It has been a racy year so far for Aston Martin (LSE: AML). Aston Martin shares have more than doubled since the beginning of 2023, zooming up by 110%.
Despite that, the shares are not even a tenth of the price at which they listed in 2018.
So, with strong momentum but a beaten-down share price, could it make sense for me to add the shares to my portfolio now?
Powerful potential
In some ways, I think Aston Martin may be a great business to invest in.
It has a unique and iconic brand, a well-heeled customer base, and deep loyalty from legions of fans.
But one important thing about a business is always its balance sheet. If a company has a lot of debt, it can end up making losses even if it registers healthy sales at high prices.
Aston Martin exemplifies that.
In the first half of this year, the company grew its wholesale revenues by 10% compared to the same period last year. Revenue growth was even higher at 25%, illustrating the sort of pricing power commanded by the luxury marque.
The company also managed to reduce its net debt by a third. But it still stood at £846m at the end of June.
Reasons for optimism
Given that the debt remains high and the company is still deeply unprofitable, why have Aston Martin shares surged this year?
Certainly the rising sales volumes, combined with even bigger revenue growth, is attractive. It suggests that the company could deliver on its aggressive sales growth targets while also setting the stage for longer-term profitability.
The company also issued yet more shares. That further diluted long-suffering shareholders, who have seen their relative holdings sizes shrink due to multiple dilutive share issues.
But on the positive side, raising more funds should help the company pay down more of its debt. That is good news because the debt carries high interest rates.
Risk and reward
On top of that, the company has continued to attract large sums from investors such as rival carmakers Geely and Mercedes-Benz, as well as Saudia Arabia’s sovereign wealth fund. That suggests that some smart money sees value in buying Aston Martin shares.
But what is right for them might not make sense for me as a small private investor. Mercedes (and Geely) could team up with Aston Martin on things like engine development. I am not going to do that.
Nor do I have the sort of clout as a shareholder enjoyed by a massive sovereign wealth fund with a large stake.
In under five years as a listed company, Aston Martin has destroyed shareholder value on a massive scale.
If business continues to improve, I think the shares could move up further.
However, I do not like the risk profile. The business has been a money pit, continues to report losses, and there is a risk of further shareholder dilution.
I am avoiding the shares.
