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Warning! I think the Aston Martin share price could fall a further 40%

Aston Martin (LSE: AML) announced its intention to go public in the third quarter of 2018. At the time, I was cautiously optimistic on the outlook for the shares. The booming demand for luxury products, the company’s global expansion plans and growth ambitions were all attractive qualities.

However, I was worried about the firm’s lack of financial stability. Before its IPO, the organisation had declared bankruptcy no less than seven times. Unfortunately, it looks to me as if the company is on the same path once again.

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Living up to expectations

Aston Martin’s expansion plans have not lived up to expectations. Demand growth for its most profitable products has been lower than expected, and the company has failed to capitalise on the luxury product boom.

Since its IPO in 2018, Aston Martin has lurched from disaster to disaster. The stock price has crumbled, and investors have fled. The company has staked its future on a new vehicle, the DBX. This unique sports utility vehicle is being built at a new facility in Wales.

It has taken longer to develop than expected and while the company has already received 1,800 pre-orders, it’s starting to look increasingly unlikely that this new product will save the business.

Moreover, as Aston Martin has pushed ahead developing the DBX, legacy vehicle sales have not lived up to expectations. As a result, profits have fallen and cash flow has declined substantially.

Growing debts

It now looks as if Aston is in something of a downward spiral. The company has spent much of the past six months scrambling to raise finance to keep the lights on.

In September of last year, it raised $150m of high-interest debt, with the option to borrow a further $100m if orders for the DBX hit 1,400. The cost of this additional debt: 15%.

To try and allay concerns about its financial position, Aston Martin has now put together a £500m rescue deal, led by Canadian Formula 1 billionaire Lawrence Stroll. Under the terms of the deal, Mr Stroll will inject £182m for a stake of 16.7%. A further £318m will come from a rights issue after the company’s results next month. This deal means the firm won’t have to draw down the extra $100m debt tranche. 

No quick fix

The stock jumped by more than a fifth after the company announced this deal on Friday. It seems the market likes the sound of this rescue package. 

However, I’m not convinced. Aston Martin has burnt through its cash reserves rapidly since the company’s IPO. Therefore, there’s no guarantee that this latest fundraising will be the last. 

As part of the deal, the company is going to try to reduce costs. It is also going to delay investments into a suite of electric vehicles. Previously, management wanted to get these to the market by 2022. The date has now been pushed back to 2025. 

With the world rapidly moving away from the internal combustion engine, this could mean that Aston Martin is left behind. 

Therefore, it might be better to avoid the Aston Martin share price for the time being. Only time will tell if the latest fundraising can stabilise the business so it might be better for investors to stay on the sidelines for the time being. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.