Even low-confidence stocks can spike from time to time. Prospective investors might be tempted to take a chance on electric vehicle (EV) manufacturer Mullen Automotive (NASDAQ:MULN) after a sudden surge in MULN stock. Yet, for the long term, Mullen Automotive will probably just disappoint its loyal shareholders.
As we’ll discover, Mullen Automotive is dealing with a delisting threat and has financial issues to contend with. Yet, the company is spending money as if it is in terrific fiscal condition. It’s a recipe for disaster, so let’s delve into the worrisome details of this unusual automotive startup.
Why Did MULN Stock Jump 19%?
Again, even low-conviction stocks can have good days. For instance, MULN stock jumped 19.3% to 68 cents on Sept. 15. Bear in mind, though, that the stock traded at $8 at the beginning of 2023 and was much higher than that in 2021.
Still, I won’t deny that Mullen Automotive’s shareholders enjoyed a brief windfall on Sept. 15. So, what prompted this stock-price spike? It didn’t seem to have anything to do with Mullen’s announcement of new stops on the company’s “Strikingly Different” automotive tour, as this was disclosed on the morning of Sept. 14.
Presumably, the Sept. 15 catalyst was the the United Auto Workers (UAW) union strike. Apparently, this was bad news for automotive-market competitors Ford (NYSE:F), General Motors (NYSE:GM) and Stellantis (NYSE:STLA), and was therefore perceived as positive news for Mullen Automotive.
That catalyst was enough to prompt a single-day surge in MULN stock, but it doesn’t fix Mullen Automotive’s problems, which I will discuss momentarily. Besides, union-worker strikes can’t keep financial traders excited about Mullen Automotive forever. Headlines will come and go, but Mullen still needs to solve its major financial issues.
Mullen Automotive’s Big Purchases and Delisting Threat
So, let’s talk about Mullen Automotive’s financial problems now. For the quarter that ended the three months ending June 30, Mullen’s net loss attributable to common stockholders after preferred dividends ballooned to $308.9 million, or $11.14 per share. That’s a substantial per-share earnings loss, considering the company’s low share price.
For comparison, Mullen Automotive’s net loss was $7.1 million, or $4.26 per share, in the year-earlier quarter. It’s also worth mentioning that Mullen’s operating cash flow for the three months ending June 30 was deeply negative, at around -$46 million.
Nevertheless, Mullen Automotive is apparently glad to spend money on share buybacks and an approximately $3.5 million purchase of Romeo Power’s battery-pack production assets. (Nikola (NASDAQ:NKLA) acquired Romeo Power in 2022.)
Finally, I can’t ignore the elephant in the room. The Nasdaq exchange sent a delisting threat to Mullen Automotive because MULN stock failed to maintain a minimum $1 bid price for a prolonged period of time. Mullen has filed an appeal of the exchange’s potential-delisting notice, but this feels like an act of desperation.
Head-Fakes Can Trap Unwary Investors Into MULN Stock
Mullen Automotive might find a way to avoid imminent Nasdaq-exchange delisting. However, there may be more delisting threats in the future.
Furthermore, Mullen Automotive has deep financial issues. These include a widening net earnings loss and a penchant for spending money.
Therefore, if MULN stock head-fakes to the upside from time to time, these are probably traps. Frankly, it’s dangerous to invest in Mullen Automotive for the long term, and the risk of deep capital loss can’t be ignored.
Mullen might or might not manage to avert delisting from the Nasdaq exchange. Still, Mullen Automotive has significant problems to overcome, and cautious investors should seek EV-market returns elsewhere.
On the date of publication, David Moadel did not have (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.