Faraday Future Intelligent Electric (NASDAQ:FFIE) is the perfect encapsulation of why investors should not bet on penny stocks or meme stocks. Trying to parlay a good story (or not so good in this case) into a winning investment usually ends up in tragedy and losses. The electric vehicle (EV) maker shows how that can play out.
In less than a year, Faraday Future stock wiped out virtually 100% of its value. Now it is likely to be delisted from the Nasdaq Exchange and will probably declare bankruptcy soon. For all those investors who bought shares at $70 a stub — not to mention at its 52-week high of $117 a share — the losses have been nothing short of a catastrophe. Even for those who got in at $2 or $4 a share just a couple of weeks ago, they are about to be wiped out.
That is why fundamentals always matter. Ignoring them can only lead to disaster.
Riding the Meme Stock Wave
There was never any hope for the Faraday Future stock to deliver on its promise. The EV stock had little to no financing available to make the number of cars it wanted. When even better-financed luxury EV companies like Lucid Group (NASDAQ:LCID) and Rivian (NASDAQ:RIVN) are having difficulty producing the number of cars they promised their shareholders despite substantial backing, a startup like Faraday Future had no chance.
And yet some traders held out hope. When meme stock trader Keith Gill, known as Roaring Kitty, made a cryptic post on X sent the meme stock poster kids GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) soaring, Faraday Future stock went along for the ride.
There was little justification for either the video game retailer or the movie theater operator to jump as they did. There was absolutely no reason the EV maker should have risen so high.
It all came down to traders simply rushing in to catch the wave. But unless you were very early, you ended up holding the bag. GME stock surged 60% in value crashed 56%, while AMC stock rose 32% before losing 34%. Now, Faraday Future did rocket a ridiculous 500% higher, so anyone holding the stock had a perfect excuse to sell. The stock subsequently crashed 75% from its high point, and there is nothing underneath to keep it from falling further.
The Future Was Always Bleak
Faraday Future’s goal was to produce super luxury EVs. After years of waiting, the automaker announced earlier this year it finally began production on its first car. The FF 91 has over 1,000 horsepower and can go from 0 to 60 mph in just 2.27 seconds. That’s fast but meaningless because there is no place to drive like that except on a test track. All manufacturers make such useless announcements, but investors, in particular, should ignore the noise.
Production was all a tightrope walk anyway. Faraday previously warned if it didn’t secure additional funding the first vehicle wouldn’t roll off the assembly line. It ultimately raised $135 million by issuing convertible secured notes. Now the EV manufacturer is waving more red flags and issuing further dire warnings.
Faraday Future withdrew its full-year production guidance the other day as the reality of the weakening EV demand environment worsened. In November, it said it would produce 1,000 vehicles in 2024. That was laughable at the time, but now with just $5 million in the bank — $2 million of which is restricted cash, meaning it can’t readily get its hands on it — there is no way it can hope to cross that threshold. Now, it says it needs to raise more money again otherwise it will go bankrupt. The EV stock issued a “going concern” notice, saying it “does not have sufficient liquidity to pay its outstanding obligations and to operate its business.”
Coming to a Miserable End
The icing on the cake is the company also reported receiving a delisting notice from the Nasdaq exchange. That means if the share price doesn’t trade above $1 a share for 30 consecutive days, the exchange will pull the stock’s listing. FFIE stock would probably move to the pink sheets, otherwise known as the over-the-counter (OTC) exchange. That would cement its position as a penny stock.
Investors had warnings every step of the way that Faraday Future stock was not viable. These latest warnings are just another harsh lesson for investors. Only focus on a business’ fundamentals before committing their hard-earned money to a stock.
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On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.