Stark actually profitable... kinda

[happyinmotion]

From Stark on LinkedIn: "Stark Future SL Achieves the First Month of EBITDA Profitability and Records All-Time High Revenue"

Stark Future SL ... is proud to announce a landmark achievement in June 2024, marking its first month of EBITDA profitability within just four years of its inception. The company also celebrated an all-time high [monthly] revenue of 10.4 million EUR, with an EBITDA of 210,000 EUR, underscoring its rapid ascent and operational efficiency.

I work in venture capital. I can say with experience that most start-ups fail. Most electric vehicle companies fail. Alta burned through US$44 million without making a profit. Cake raised at least $75m and went bankrupt. So it's pretty damn awesome that Stark are looking very strong.

Obviously, there's a heap of caveats here. EBITDA profit isn't net profit. EBITDA is "Earnings before interest, taxes, depreciation and amortization". That means some important costs are not included:
- Interest will be the big one. Stark will be in debt - they had to pay up-front to build the factory. How much debt and how much interest cost? Don't know. Some of that cost will be covered by the €50m equity investment from Eicher (Royal Enfield) so no interest but some is debt and that means interest, even if it is at reasonable rates (that's the €20m working capital facility from Banco Santander and the €25m credit from Big Bets).
- Taxes should be zero as they're yet to make an actual profit.
- Depreciation will also be a cost coz factories don't last forever.
- Amortization (like depreciation but for intangibles like the value of Stark's technology & design) - I don't know how Stark are accounting for this, might be zero.

And some of the sales will be the pent-up demand as buyers have had to wait for two years, so they have three years of orders squeezed into one year of deliveries.

But postive EBITDA means Stark are fundamentally strong - they're selling bikes for more than it costs to build them. Build costs will only go down as volumes go up, so profits should be up and be there to pay off the factory and the funds already spent to get the company to where it is right now.

 

[Beagle]

I don't know anything in finance nor business, just doing some elementary school calculations here.

Assuming all revenue comes from bike sales, 10.4 million euros would be 740-800 bikes sold in June, let's say 750.

EBITDA of 210 000 € would be 280 € per bike, is a 2% margin realistic? The benefit per bike must vary between dealer or direct sales and also shipping cost (especially comparing Europe and US).

Then of course with fixed costs, benefit per bike largely depends on sales numbers. We know the Varg is their halo product, but the real test, and real money, will be when they'll get to the much much bigger market of road bikes (planned for 2025).

 

[happyinmotion]

I'd say you do know plenty about finance, coz that's the right calculation to do - profit per bike is what matters in the long term.

Stark are actually a bit worse than your estimate. They've said 1,000 bikes sold per month to get that profit so €210 off each.

(We also know that the average price of the bikes is €10,900. That average comes from a mix of direct sales at €12,900 and sales to dealers at a lower price.)

Higher margins will come with bigger numbers. They always do. Some of that is the fixed costs that you mention, eg management and marketing. A bigger change is that making bikes gets cheaper per bike as numbers go up. There's the direct effects, eg if you're buying 10,000 bolts then you'll get them cheaper than if you are buying 1,000. Lots of the cost reduction comes as machinery gets more productive faster than it gets more expensive, eg if you buy a CNC that costs twice as much it might make three times as many parts. More of the cost reduction it is just learning by doing, eg the engineer or the shop floor worker says "hey, why don't we do it this way" and you try it and discover you've saved a minute of assembly time per bike.

Estimating this kind of scaling is tricky but a rule of thumb/wild-arsed guess is 10% less cost for every doubling of production. Stark aren't Honda or Bajaj or Hero (yet) but looks to me like they're heading towards strong margins and enough profits to pay back all the costs of getting started. After that it's all gravy.

 

[Beagle]

I'm very interested in the production side of things, I feel like one of their biggest achievements is their speed of scaling up production, that is terrific. I think they claim to make (not sell) 1000 bikes per month

Any wild guess about how much profit would Honda make on a CRF450R? Or maybe even just for any "high end" bike? I really don't have a clue.

Did not know how much the dealer discount was, I would be curious about their dealer/direct sales ratio (maybe tilting towards dealer over time?) and about the "alpha ratio", not sure why but I would expect them to sell more 80 hp than 60 hp bikes (and it obviously costs the same to make).

 

[happyinmotion]

Honda have made public a whole bunch of data in their Honda Report 2023, more than I would expect.

Honda are expecting to sell 19 million bikes in 2024. That's huge economies of scale. Stark has a way to go yet.

Honda's margins for motorbikes are 16.8% (page 12). That's for the bike division overall. Most of those will be cheap bikes with small engines for poorer nations where customers are very sensitive to price. A CRF450R is a low-production bike for wealthy markets so their margin is likely a lot higher on this model. Maybe 20%? Maybe 30%? I don't know. But Honda could drop their CRF450R prices by maybe 20-30% and still make a profit.

But here's the thing - Stark are making 10,000 per year (give or take). If Stark up their production by 100x to a million per year then their cost to build a bike will roughly halve. If Stark can halve that then Stark can halve their price and still make a profit. That's going to be a much cheaper bike than any petrol bike.

That makes sense to me - there's just fewer components in an electric bike so they'll fundamentally cost less to make. Petrol bikes are cheaper now because we make so many more of them. When we're making the same number of petrol and electric bikes then electric bikes will be cheaper and petrol will be gone.

(Also, Honda's company-wide margins are 4.6%. On motorbikes it's 16.8%. That's a really big difference. I can only presume that motorbike buyers either don't care very much about price or that you're all getting ripped off.)

 

[UKLee]

"I work in venture capital. I can say with experience that most start-ups fail. Most electric vehicle companies fail. Alta burned through US$44 million without making a profit. Cake raised at least $75m and went bankrupt. So it's pretty damn awesome that Stark are looking very strong."

Depends on what you mean by "fail" you can bet the guy who started the business will be ok one way or another, some even plan it this way from the start.

Margins on bikes might well be small but they need to sell the bikes to us who then need parts to keep them going, I have seen it estimated that if you were to build a bike out of spare parts it would cost you 4 to 5 times what it would cost you to buy a new bike so this is where they make most of the profit. With a modern 4 stroke bike you need to be chucking pistons, valves, cams etc at it often and plenty of other parts in crash damage blow ups etc.

This is also one of the reasons the manufactures want to continue selling these very expensive to run bikes instead of allowing the electric bikes that require a lot less parts (hopefully!) to take over.

 

[happyinmotion]

Yeah, I can see why Stark are wanting to have a subscription model. That way they get some ongoing income from the bike.

Whereas for a combustion bike you're going to keep on buying replacement parts at a high margin.

I know lots of people hate subscriptions, but I think I'm ok with it. The bike is cheap as after you've bought it - no fuel or parts. The one litre of oil that I've bought should last me two years. So I'll be coming out ahead, even if I'm paying a bit per month.

 

[Kurlon]

Alta got shafted by HD, they didn't fail from natural causes.

 

[happyinmotion]

I've heard mixed tales about Alta. HD definitely screwed them, but if the business side of Alta was strong enough then HD wouldn't have been able to screw them.

Their sales were maybe a tenth of Stark's sales. That's would have made it very hard to get to profitability. Stark is in a much better position and heading for real profits.

 

[Beagle]

I've heard mixed tales about Alta. HD definitely screwed them, but if the business side of Alta was strong enough then HD wouldn't have been able to screw them.

Their sales were maybe a tenth of Stark's sales. That's would have made it very hard to get to profitability. Stark is in a much better position and heading for real profits.

Yeah the production side of things is off the charts, Alta made about 1000 bikes in 3 years, Stark makes 1000 bikes every month.