The real reasons Faraday Future is getting creamed after earnings

Shares of Faraday Future Intelligent Electric – arguably the real meme stock of the moment – are crashing, down almost 50% on the day as of 2:45pm ET.

The electric vehicle maker reported results for full-year 2023 on Tuesday evening, showing a net operating loss of $286 million, while management said they could no longer commit to their previously-outlined production target for 2024.

The Wall Street Journal connected Faraday’s decline to its withdrawn output guidance and the state of the EV market in general, which is facing a stiff challenge from Chinese supply.

But I don't think the broad challenges EV makers face from an ascendant China or these specific earnings results are the reasons. The income statement was never going to be anything other than a sea of red for a company that’s delivered about a dozen vehicles since its inception.

So what is it? Let’s listen to chief financial officer Jonathan Maroko on Tuesday night’s conference call:

“We continue to believe our biggest barrier to vehicle sales and profitability is the capital required to produce vehicles at scale. If our funding picture improves, we believe our production, delivery and revenue picture can all follow and be updated to reflect that positive movement.”

That statement clearly frames the company’s capital position as the bottleneck that needs to be resolved. Then, apparently, everything else will improve.

So, reason #1: The company needs more money. The market is sniffing out that to get this money, the company might have to do things that are negative for existing shareholders (namely, issuing more shares).

Faraday needs shareholder approval to boost its share count. And that’s an option that is likely to be on the menu after the stock rallied from less than $0.05 on May 10 to still above $0.60, even after Wednesday’s tumble. Hey, it worked for AMC and GameStop!

Some more quotes from Maroko:

“We are currently exploring other debt and equity financing opportunities and other non-dilutive financing options.”

“...we continue to pursue additional significant strategic investors in the Middle East and throughout the world. Equipment and IP-backed financing are also being investigated and we look forward to potentially reducing our reliance on dilutive funding.”

Another way of saying “we look forward to potentially reducing our reliance on dilutive funding” is “we’re still open to dilutive funding if necessary.”

If it’s not about dilution, then perhaps let’s look for reason #2: There’s no new positive catalyst from the quarterly results and earnings call, nothing to glom onto to entice a fresh wave of buyers to buy a stock that has made monumental gains on no news so far this month. Though if you ask Maroko, the surge was overdue.

“Recently, we've seen a dramatic revaluation of our stock by the market,” he said. “In our view, we believe the stock was previously undervalued and we welcome this adjustment.”