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From a quick glance at the mirror, the surging pace of electric vehicle upstart Faraday Future (FFIE) may easily spark FOMO or the fear of missing out. Just in the trailing month, FFIE stock gained a blistering 104.45%. So far this year, shares moved up almost 67%. Adding to the sense of urgency, last Friday, they jumped over 12%.
Likely undergirding sentiment is good old-fashioned speculation. Let’s face reality here. Despite the astonishing performance, the Barchart Technical Opinion indicator still rates FFIE stock a sell. Granted, it’s a weak 8% sell, meaning that future improvements could swing the needle decisively into positive territory. Seeing as how meme stocks can occasionally defy gravity, Faraday might seem like reasonable speculation to some.
However, investors operating outside the mentality of wild gambling practices should exercise extreme caution. Primarily, it’s possible that the enlivened nature of this rally may fade out soon enough. Try as it might to fix the narrative, Faraday suffers from severe fundamental vulnerabilities. Therefore, a disciplined approach combined with common sense should be your north star.
FFIE Stock May Enjoy Limited Justification for Optimism
Like anything in life, very few things are purely black and white. This framework includes FFIE stock. While a traditional analysis on the underlying business will arguably yield a poor result, Faraday isn’t completely devoid of positives.
Fundamentally, fading costs of raw materials relative to especially the first half of 2022 presents an enticing backdrop for FFIE stock and other EV companies. Last year, skyrocketing inflation and a geopolitical crisis imposed a severe impact on the global commodities market. On both the front and back end, EV manufacturers suffered sharply.
Now, with trends somewhat normalizing, Faraday enjoys a more favorable environment to rejuvenate production. If anything, the rangebound prices of raw materials since last November should afford some measure of predictability for the EV industry. That could be a big help for the smaller entities, thus contributing to the spike in FFIE stock.
However, in the bigger picture, Faraday unquestionably symbolizes a wildly risky market idea. Despite the strong print mentioned earlier, in the past 365 days, FFIE gave up more than 82% of equity value. Since making its public market debut, shares plunged more than 95%.
Nevertheless, for meme-stock traders, bad news can be good news, especially if you’re trying to spark a short squeeze. At time of writing, the short interest of FFIE stock comes out to 21.14% of its float, which is an elevated figure.
Even more compelling, none of the positives have been lost to traders in the derivatives market. Following the close of the June 16 session, FFIE stock became one of the highlights on Barchart’s screener for unusual stock options volume.
Specifically, total volume reached 50,200 contracts against an open interest reading of 263,284 contracts. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 361.95%. Drilling down, call volume hit 49,683 contracts against put volume of only 517.
While this pairing seemingly favors piling into the bullish trade, rational investors need to take a breather.
Faraday Might Not Have a Future
According to Stocknews.com, FFIE stock represents one of the must-sell EV trades. At the time of publication, the investment resource noted that for its fourth quarter of 2022 earnings report, Faraday’s operating loss landed at $83.92 million. Further, its net loss was $153.9 million or 32 cents per share, stats that expanded unfavorably against the year-ago quarter.
Unfortunately, circumstances didn’t improve that much better in the most recent read for Q1 2023. With Faraday posting an operating loss of $79 million, circumstances are getting rather bleak. Keep in mind that so far, Faraday is a pre-revenue enterprise. If conditions in the broader economy become pressured, it’s unlikely that investors will pile into risk-on assets like FFIE stock.
If the red ink on the income statement wasn’t enough, what’s really worrying about Faraday is its balance sheet. For the quarter ending March 31, the company only had $32 million in cash and cash equivalents. On the other end of the scale, its free cash flow (FCF) came out to a loss of $120 million.
Unless Faraday starts delivering real substance in its financials, management will have little choice but to issue debt or conduct other dilutive actions, such as issue stock. Indeed, in Q1, Faraday incurred $131 million of net debt issuance.
For aspirational but promising companies, investors may justify desperate measures to buy time. However, even if it buys the time necessary, Faraday still wants to sell its EVs at nearly a quarter of a million dollars. I’m sorry but in my opinion, this is utterly irrational.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
