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Why I think the Aston Martin share price could go much lower

Want an example of why buying shares at IPO can be a very bad idea? Look no further than Aston Martin Lagonda (LSE: AML). The Aston Martin share price opened at 1,900p on the day of flotation in September 2018, immediately started falling, and kept on heading down. It was almost as if investors from day one expected the company, having gone bust seven times in its history, to repeat the feat again.

By the time the shares reached rock bottom on 14 May, they stood at just 27.5p. That’s a staggering loss of 98.6%. That’s almost the entire initial value of the company. And, for those who bought on that first day, it’s pretty much indistinguishable from going bust.

But then, on 26 May, we saw a sudden turnaround that pushed the Aston Martin share price up. By market close on 4 June, the shares had climbed by 88%. It was all down to the announcement of a new CEO, but no ordinary CEO. No, Tobias Moers, CEO of Mercedes-AMG, is the new boss. And if anyone knows how to run a luxury car company, surely he does.

This change might just have come at the best possible time. Or at least, any later might well have been too late. Mr Moers has already started to make his mark, as we learned on 4 June when we heard further details of the firm’s turnaround plan. Investors did not meet the update with immediate enthusiasm, mind, and the Aston Martin share price gave up a little of its recent recovery.

Fundamental reset

Speaking of a “a fundamental reset“, the firm emphasised the need for a “reduction in front-engined sports car production to rebalance supply to demand“. The reduction in previously planned production is going to lead to the loss of up to 500 jobs. That’s unfortunate, but the outflow of cash that’s not matched by sales has to be stopped.

This approach looks to me like a focus on reality, which the firm has previously failed to grasp. With the cost savings the new measures will create, Aston Martin is taking on short-term pain for long-term gain. At least, that’s the aim. My Motley Fool colleague Jonathan Smith has highlighted a number of positives for the long-term outlook.

Aston Martin share price: headed down?

I agree with his points, and I think there’s a chance it will result in a sustainable recovery now. But I still think we’re looking at a very risky investment. And I reckon there’s a very real possibility that the Aston Martin share price could fall even further instead. Maybe just in the short term, but maybe forever.

The company might have set itself on the road to profitability, but those profits are still some way away. Forecasts for around £340m in pre-tax losses for this year and next combined might be softened now. But the few tens of millions in savings expected from the latest moves won’t come close to that.

I think we could still see another rights issue before we see profits. And the dilution that would bring could well hammer the Aston Martin share price again.

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Alan Oscroft has no position in any of the shares 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.