Motley Fool Hidden Gems Investing - Fisker: No Gas, All Brakes

Episode Date: June 18, 2024

Sometimes, a billion bucks just isn’t enough to kickstart the engine. (00:21) Asit Sharma and Mary Long discuss Fisker’s bankruptcy and Wells Fargo’s latest credit card bet. Then, at (17:22), Ailson and Bro tackle the listener mailbag, answering questions about retirement distributions, target date funds, and commodities. Learn more about the Range Rover Sport at www.landroverusa.com Got a question for Alison and Bro? Email it to [e-mail] Companies discussed: FSRN, TSLA, WFC, GSG, DBC, GLD Host: Mary Long Guests: Asit Sharma, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

You gotta try breakfast at A&W. You gotta try breakfast at A&W. And what better way than with a delicious Pret Organic Coffee? Starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. the big dogs are big for a reason you're listening to motley fool money i'm mary long joined today by asit sharma asit thank you for spending a part of your day with

us on Motley Fool Money. Mary, it's always the best part of the day. Thanks for having me. Good part of the day for us, but not so much the case for some other companies. Today, we have two stories of unsuccess, I'm going to say. The first is with the electric vehicle company Fisker. They filed for bankruptcy. The pitch with Fisker was that it could emulate Tesla's success and have a cheaper, faster entry into the auto industry, and that it would do this largely by outsourcing its manufacturing. The first vehicle called the Ocean SUV ran for 360 miles on a single charge, had a sweet design and a sticker price of under $40,000. The car's rollout was not the smoothest, but we'll get to that in a bit. Finance is ultimately what hurt Fisker here.

The company raised a billion dollars to launch operations, burned through almost all of its cash reserves, defaults on a debt with a key investor. What's your initial reaction to all this? For me, this just drives home that in the EV market, either you need scale or you need capital. Either you need a huge amount of production capability in hand with some demand behind that, or you need a lot of money. You need money to get scale. $1 billion, my other thought, that's a lot of money, but it doesn't go a long way in this very young which is extremely complex. Look, we have to understand too, Fisker, partially they were suffering from industry headwinds. There was this wave of enthusiasm for EVs. That's tapered off

some. Interest rates have risen, so financing is harder for these vehicles. The tax credit picture keeps changing here in the U.S. But I wonder, they decided to go upmarket with their first vehicle. You rightfully point out, this is a $40,000 price tag. For EVs, that's maybe not so upmarket. But still, the presentation of the vehicle, the sophistication of it spoke of that luxury feel, to borrow the early iterations that Tesla came to market with. But it's just so difficult to do that, insanely difficult. They rolled the Ocean out really before it was ready for big time. I believe they delivered a batch of Oceans, one of their releases without cruise control. They're fixing that with some other problems via software

and hardware updates. There's that. Then the other initial reaction I have is, just a lot of cell phones, when you start looking at the financial side of this company, we'll talk about those. One being, they just couldn't file SEC documents on a timely basis. That's one of the things that hurt them. We can get into the whys of that again as we talk about this. There are not many times in my life where I see dollar sign 1 billion and I think, really? That's it? And that was kind of my reaction when reading about this story. As you mentioned, it's really capital intensive and a billion dollars doesn't seem like enough to really get you going. Say that you had gotten a call from CEO Enrique Fisker earlier this year

and he's offering you a spot in the C-suite, what would you have done to try and right this sinking ship back then? It's just so difficult. I'm not sure there's anything that optimization or cost cutting could have done in such a short amount of time. So it might've been a case of just telling the truth, saying you need money, so let's go find a private investor, maybe take the company private, or maybe let's go get a relationship with a major manufacturer. But Fisker was already doing this. He was in talks with an unnamed automaker, a major automaker that fell through. That's why we got the news of this bankruptcy this week. That was the last straw. So, things broke there. I think that for people who find

themselves in this position, there are a number of things you try as last gasp efforts. They did try to go to a dealership model. It was direct sales before that. The sales and marketing line their income statement was large, but too little, too late. This is Enrique's second attempt at building an automotive company. His first also went bankrupt after launching its first model, which was a $100,000 hybrid plugin. In that in-between, Fisker has said that he tried to learn from the mistakes that he made during that first go. Some of that being that he wanted to raise more money, partner with more reputable suppliers. They say that third time's the charm. If Fisker decides to give this biz another try, what mistakes do you think he should learn from

this go around? Look, I don't want to sound too harsh here, Mary. It's so easy to sit here in a chair with a podcast mic in front of you and make it sound as if someone who's gone out and built an electric vehicle doesn't understand business dynamics. But I would walk him through that. Basically, the company thought it was creating a licensing of IP model. They had the designs for the car. They had a lot of R&D and tech. They went to an amazing contract manufacturer whose subsidiary is based in Austria. It's Magna International. This company also makes those big, boxy, beautiful, iconic Mercedes G SUVs and a ton of other cars on lines that can go either conventional or electric. A fascinating company, but they didn't have enough volume going

through their contract manufacturer's line. When you don't do that, the agreements you have in place with such manufacturers leaves you on the hook for money. Your cost of goods sold line on your income statement looks almost as bad as it would if you had produced the stuff yourself. I might have said, look, for a third time around, consider raising enough money and going the Tesla route, just making your own production facilities. At the same time, I think this idea of volume, how to hit the right break-even points is extremely important in the EV industry. Understanding where your true break-even point is going to be and engineering a vehicle behind that. Don't come to either a contract manufacturer

or your own manufacturing people if you decide to build a house and say, I want to build this car, it's got all these great features. Figure out where you can find that break-even and then design a really great car backwards. One last thing I'll say on advice next time around, and look, this is a luminary in the car business. Fisker, maybe he wants to resurface a third time. I would not be someone to say, don't give this guy another chance. I would say this, though, and this is a basic principle of manufacturing finance. If you are in a highly technical industry, let's say aerospace or this, EV manufacturing, but it's an incipient industry and it's got wavering demand states. If you think you'll need a billion bucks,

raise $3 billion. This is an underappreciated strength of Elon Musk. He is a master showman. He's never had trouble raising capital, convincing private and public investors to back his ideas. Maybe now Tesla's facing industry headwinds. There's more pessimism about the company. But in the early days, this was a skill and a talent of entrepreneurialism that he had in spades. And it helped him weather those really tough times and get to the volume states that I've been talking about to make a profit. We were talking in the pre-record about, I'm going to say one of the quirks of this company too, and that is a relational quirk. One of the co-founders, but also the spouse of Enrique Fisker is the chief financial officer

and the chief operating officer. I don't want to say that that's a red flag off the bat, but how does that maybe complicate the situation here a bit? Well, Mary, we were trying to remember not just in a publicly traded company when we had both seen a married couple in the C-suite, but also a married couple in which one of them held more than two C positions. And I'm going to read you what Dr. Geeta Gupta-Fisker was tasked with as the chief operating officer and chief financial officer. Well, let's put this in the present tense. It's still a company, even though it's declared bankruptcy. She is responsible for operations, finance and planning, purchasing and supply chain management, insurance, treasury,

tax, intellectual property management, and preparing the company for gap compliance and public market readiness. So that is a red flag. Let's call this for what it is. And here I'm going to fault one of my heroes, which is Bill McDermott, well-known entrepreneur, leader of service now, who's on the board. I would have sat these two down and told them that, look, you can't possibly have one person in the electrical vehicle market who's going to be responsible for all the financial stuff and also the supply chain management. That's bonkers. That's nuts. And you see the sad end of this is that she couldn't do all of this. I mean, she couldn't keep all these plates spinning. In fact, Fisker filed several statements late,

I think at least two statements. I shouldn't say several, but one of those was pretty important because in filing one statement, I believe it's their 10-K for last year, late, they triggered a clause with some convertible note holders, which allowed a partial conversion feature to take place. That had some downstream consequences. I believe they fixed it. But you just get a sense of a company that didn't understand some basic business principles. As you said, Mary, when we were chatting beforehand, there must be some other talented people out there in the big wide business world that you can hire for these functions that normally have more than one person behind them. Yeah. And as we've said throughout this

whole discussion, this is a tough industry, right? It's exciting technology, but it's still pretty new. Are there any non-Tesla EV startups that you see out there that actually stand a chance of succeeding in this tough environment that have a chance of getting this right. Yeah. I'm just not going to go on much of a limb here. I mean, I'll say BYD, which is not really that much of a startup anymore in China. I think they have everything that it takes. Plus, they have a favorable environment in some subsidies in China. So I'll stick with them. I know I'll name one and next week we'll be talking about it. Awesome. That company you named went bankrupt. Yeah, this is not the first electric vehicle company that has gone bankrupt.

Fisker also went public via SPAC in 2020. And there have been a few other EV companies, Lordstown and Proterra being two others that also went public via this route and have already filed for bankruptcy. So this is not an unfamiliar story. We're going to pivot, kind of stick in this realm of unsuccess. The Wall Street Journal published a story on Sunday about the seemingly strained relationship between Wells Fargo and Bilt, which is a fintech startup that's backed by Blackstone and MasterCard. So you might say decently big names. Together, Wells Fargo and Bilt put out a credit card that lets its users earn rewards points on rent without incurring any additional fees from landlords. Because of that, Bilt is a buzzy name, but according to the

journal, Wells is losing as much as $10 million every month on this program. Asit, what went wrong here? Where did the formula break? Well, the formula is such an interesting one because Wells Fargo as a bank conceivably was going to make money on all the balances that were on these cards and all the usage of the cards. And they were so eager to do this that they assumed the interchange fees that normally you pay in a transaction. So meaning thereby, one reason we don't see this in widespread use, if I'm your landlord, Mary, let's reverse that. If you're my landlord, you don't want to take my credit card because you'll have to pay 2% to 3% to process that transaction. You want to check. Wells mechanistically took that on by themselves.

I won't get into the deets here, but made it so that you could use your credit card to pay your landlord. They would eat those fees, and they were going to make money on the card relationship. Now, it's just a really hard industry to do this. Banks do well when they stick with proven models. they have big-time brands they team up with, with huge followings. Like, I'm the bank with the card, you're the airline that everyone knows, let's get together, let's make some money off of points. Whenever you stray from those tried-and-true formulas, it entails a lot of risk. Innovation is hard in this industry, it's brutal. You can tie up with the most valuable brand on the planet and still lose money. Just look at Goldman Sachs losing billions with the Apple Card. I think

think they're finally on their way out of that business. We were going back and forth about this over Slack last night, and I asked you if you had any spicy takes, and you said, I've got something, and then kind of said, well, we can take this in a longer direction, too. Let's get to that longer direction. What was Wells thinking about this one when they dove into it in the first place? Yeah, that's a great way to phrase it, Mary. What were you thinking? And I don't want to be too hard on Wells Fargo here. I really think they're past their worst problems of years ago. they no longer have this sort of toxic culture at the top that led to so many fraud scandals of the past. But they had some assumptions that were way off base. Let's talk about some. I'm

quoting here from the Wall Street Journal. Few projections that Wells had for the card have panned out. The bank assumed around 65% of card purchase volume would be non-rent, generating interchange fee revenue. The reality is inverted. So, if you do the math on that, and you could use figures for average rent, $1,500, according to several services across the country, or the median point of monthly rent in the U.S. of $2,400. If that's 35% of card purchasing in a month, the bank is assuming that the cardholder has maybe another $4,500 in monthly credit cards pending up for grabs. We're talking about a person who, after they put away their monthly savings, they paid all their bills, and they paid for housing using

this card, it's going to outlay another $4,500 in credit card spending. Look, in a lot of cases, that's more likely to be a homeowner, someone who's more established later in their career earning more. I'm not sure how they got that assumption on the table and it passed muster. What were you thinking, Wells? Well, I think a lot of the marketing for this card too, was targeted towards people who are savvy with credit card rewards points. And I understand that that can be a really high value customer that banks want to acquire. But if the main selling point of this card is, hey, you'll earn points from paying off your rent. Okay. People that are pretty savvy with credit card points are paying off their rent first thing.

And they're going to reap the benefits of those points and milk the system for what it's worth. And so, it's not that surprising to me that this happened, because it seems like that is the customer they were marketing to in the first place. That is so true. I mean, it's such a great point. Let me quote once more from the Wall Street Journal to prove out your point here. Wells expected that around half to three-fourths of dollars charged to the card would carry over from month to month, generating interest charges. The reality ranges between 15% and 25%. Many customers would pay their rent off within a few days of charging it to their cards, weeks before their statements arrived, a strategy savvy cardholders use just to earn points.

Wells is out there co-marketing this card. At the same time, you've got these sites like the Points guy, like the Ascent, who are reviewing these cards. Folks who understand the points business are not the type to keep huge balances month after month. They're not people, if Wells was expecting this, that are that financially strapped. So this whole assumption that they would be making a lot off the interest, the carry on the balances was totally misguided as well. And look, it's a big bank. It's a huge bank. So this isn't really going to hurt them that much. If you're a Wells Fargo shareholder, I hope we're not scaring you away from the proposition. This This is more of like a cautionary tale though, Marianne.

It just shows you how difficult the two businesses are and how different affinity marketing is from banking. The two have to be in just certain conditions to work right together. Yeah, I think if there's a common theme between these two stories today, it's that disruption is hard. Yeah, totally.

Thanks so much for the time, Asit. Always a pleasure to talk to you. I appreciate it, Marianne. You just found out that your sales team is at risk of missing quota. Don't panic, just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce

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Sign up for exclusive access today, rippling.ai slash fool. You've got questions, they've got answers. Up next, Allison Southwick and Robert Brokamp tackle some of the questions you emailed us at podcasts at fool.com about retirement distributions, target date funds, and commodities. Our first question comes from Ken. I've been blessed with some very good luck with my retirement portfolio returns with a big thank you to the Motley Fool for a lot of the ideas and well ahead of pace for retirement. Given this fortunate circumstance, are there ways to access retirement funds before age

59 and a half in case I decide to move on from my profession and start retirement early while I still have some Kennergy to enjoy it? Nice. I want to hang out with Ken. A majority, about 85% of our retirement portfolio is in a 401k, Roth IRA through backdoor conversion over the years, and HSAs. I've read things about SSEPs and IRS 72T rules, but it's all very confusing. Any help from the retirement pros? Should I have said SEPs? Are they called SEPs? Yeah, no, it's different from a SEP. It stands for a series of substantially equal periodic payments. What Ken is concerned about is the 10% penalty that applies to withdrawals from retirement accounts before age 59 and a half. And he wants to avoid those. You can't avoid

the taxes, but you might be able to avoid the penalties because there are all kinds of ways around it. Some of them apply to both IRAs and employer plans like 401ks. Others apply to just one or the other. So you definitely want to know the rules that apply to your particular account. and there's a whole page on irs.gov that lists them. Just do an online search for exceptions to the tax on early distributions. Now, a couple of those exceptions are of particular interest to people like Ken who want to retire early. First, if your employer plan allows it, so again, this is just like 401ks, not IRAs, you can take money out of your account if you stop working at age 55 or later, or age 50 or later for some public safety workers. That's a really broad category.

and you don't have to pay that 10% penalty. But this only applies to the plan you were participating in when you turn those ages, not an old plan that you had with a former employer. And Ken highlighted the other exception, which is known as a series of substantially equal periodic payments, otherwise known as 72T, because that's the place in the IRS code where it's explained. He mentioned that these are confusing, and he's right, because they're particularly complicated. In fact, so complicated that I'm not going to discuss them in detail here. But the bottom line is, you can make this series of, again, substantially equal periodic payments at any age, whether you're 50 or 30, by agreeing to take out a certain amount each year until you

turn 59 and a half or for five years, whichever is longer. So it's a great solution for early retirees. In fact, this is a popular topic with folks in the FIRE movement. FIRE standing for Financial Independence Retire Early, because this is how many of them tap their retirement accounts without paying penalties. But it's very important to understand that you absolutely must file the rules to the letter or you risk paying the 10% penalty on all your previous distributions plus interest. So take the time to understand those. There's a whole page on irs.gov that covers this topic. But if you're still confused after reading that and maybe some articles on the FIRE blogs, because you'll find plenty of those as well, it might be worthwhile to pay

an accountant for an hour of her or his time to help you choose the best strategy because you do have options when it comes to these periodic payments. A couple of other points, contributions to a Roth IRA can be withdrawn tax and penalty free at any age. And by contributions, I mean cash that you deposited, not the earnings and not conversions. And it sounds like Ken has conversions because that's what you have when you've done the backdoor Roth. For conversions, you have to wait at least five years before you take out that converted amount or until you turn age 59 and a half. If you take it out before those times, you'll pay a 10% penalty and each conversion has its own five-year clock. Finally, as for the health savings account, the HSA,

you can withdraw money from that account at any time as long as it's used for qualified medical expenses. However, if the withdrawal isn't qualified and you're not yet 65 years old, you pay a 20% penalty and there aren't that many ways around that. Our next question comes from Sohan. I've been listening to your podcast for over a year. Thank you for doing such a great job and helping me become a disciplined investor. Oh, you're welcome. I am looking at diversifying my assets in a taxable brokerage account that currently only has stocks by adding a few low cost ETFs. An index target date fund seems like a great option because it's easy to use, manages my allocation automatically, and is low cost.