It’s never a pleasant concept to talk about extracting value from betting against publicly traded companies. However, given the enormous challenges facing EV manufacturer Mullen Automotive (NASDAQ:MULN), the risk-reward profile may no longer favor the bulls. Suffering from cash burn and lost confidence, the enterprise appears to be flirting with inevitability. As a result, I am bearish on MULN stock.
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MULN Stock Suffers Cash Burn and Trust Issues
Fundamentally, the problem with MULN stock is that the underlying company features a relevant idea in a capital-intensive industry. Yes, electric-powered mobility may be the future of transportation. From a strictly aesthetic perspective, Mullen’s vehicles are attractive. Further, its focus on developing electric commercial vehicles aligns with contemporary zero-emissions sensibilities.
However, the business component matters too. After all, the graveyard of startup ventures is littered with good ideas that failed to pass financial muster. Here, MULN stock suffers the same debilitating headwind as practically every other pure-play EV company — the nasty price war that Tesla (NASDAQ:TSLA) started. Subsequently, numerous EV stocks incurred hefty losses since the start of the new year.
What’s worse is that MULN stock lacks the excuse of safety in numbers. Yes, the EV space is hurting, but Mullen’s case appears especially problematic. As of the fourth quarter of last year, Mullen disclosed $81.51 million in cash and cash equivalents. However, its free cash flow for that quarter sat at a loss of about $67 million.
Unfortunately, at this rate, it may run out of cash soon unless management does something drastic. It’s not an unknown risk factor for MULN stock, either. Last year, Mullen CEO David Michery stated that the company has “an additional $110 million from firm commitments” coming in by June 1.
Such words may ordinarily buoy investor confidence. However, Michery suffers from trust-related challenges. In April 2022, the CEO “teased a key announcement about the purchase of cargo vans by a major Fortune 500 company in the second quarter.” Sure enough, Q2 2022 came and went, and investors saw no update regarding this mystery Fortune 500 company.
With MULN stock down 99.84% over the past 52 weeks (on a reverse-split-adjusted basis), investors need something, anything. Predictably, not making good on a simple promise wasn’t helpful.
Extract Value from Destruction
Investors considering Mullen Automotive must ask a basic question: is there a greater probability that MULN stock will rise in value years from now, or will it continue to tumble? Based on its past history, a recovery seems unlikely. Therefore, buying a deep out-the-money (OTM), far-expiration put option might not be the worst idea.
Granted, it’s not an idea to put your life savings into – absolutely not. However, if you can get your hands on it, you may consider the MULN Jan 16 ’26 5.00 Put. Last Friday, the volume for this option saw three new contracts being initiated. It’s basically a wager that in about two years’ time, MULN stock will fall from its current price of $9.13 to $5 or even more.
If MULN stock repeats its 52-week performance, the company may sport a price tag of less than 2 cents.
Further, going with a put option is a more sensible idea relative to shorting the EV manufacturer. While the longer-term narrative is suspect, Mullen occasionally shows spurts of life. For example, in the past week, MULN stock has gained nearly 30%.
So, directly shorting shares – by borrowing securities and subsequently selling them in the hopes of reacquiring them at a lower price – presents high risks. This is especially true because the EV company attracts a loyal retail investor fanbase.
Instead, buying a put option would mitigate some of the risks. If MULN flies higher for whatever reason, the worst that can happen is that you lose the premium you paid to buy the puts. However, unlike a direct short position, you would not be obligated to cover your bad wager.
A Note About the ‘Ugly’ Business of Put Options
While betting against a company might seem unsavory, one must consider the broader implications. Like any other ecosystem, the stock market represents an arena with limited resources. Every business day, companies essentially compete with others for those limited investor dollars.
Stated differently, companies have two choices: they can either succeed, or they can fail. In a perfectly efficient capitalistic market, the most effective companies would receive the greatest share of investor capital. However, the market isn’t perfectly efficient because we have many poorly-run enterprises that are merely delaying the inevitable.
Through bearish actions, traders help accelerate the inevitable. That way, more of those limited resources can go to worthy, viable companies instead of value-draining businesses.
The Takeaway: Read the Writing on the Wall
While it may be good to be optimistic, the circumstances surrounding Mullen Automotive are troubling. With the EV manufacturer suffering cash burn in a competitive and capital-intensive industry, MULN stock might not stick around for long. Therefore, put options present an interesting mechanism to profit from its possible implosion.
