Nikola: Where is This Volatile EV Stock Headed?

While there has been a broad-based rally in startup electric vehicle (EV) companies and names like Xpeng Motors (XPEV) and Rivian (RIVN) have delivered stellar returns over the last month. Especially impressive has been the rally in Nikola (NKLA), which has risen fivefold from its June lows. 

Nikola went public in 2020 through a special purpose acquisition company (SPAC) merger – a route that became quite popular over the next two years and EV companies like Lucid Motors (LCID) and Fisker (FSR) opted for a SPAC merger to go public.

Hindenburg Research had accused Nikola and Lordstown Motors of fraud

Nikola has a troubled past and a few months after its listing, Hindenburg Research accused it of fraud and misrepresenting the ability of its vehicles. The company’s founder Trevor Milton resigned shortly after the allegations and was subsequently found guilty of fraud.

Incidentally, in 2021, Hindenburg Research also accused Lordstown Motors (RIDEQ) of fraud and the company admitted to some of its allegations. Fast forward to 2023, and Lordstown Motors has filed for bankruptcy as it hasn’t been able to raise cash to fund its loss-making operations.

Nikola started a new chapter after the Milton fiasco and focused on execution but so far it has been able to deliver only a handful of its trucks. The stock fell to its all-time low of $0.52 in June as markets got wary of the company’s ability to sustain its business. It also received a delisting notice from the Nasdaq as its stock price was below $1 – which is the minimum threshold for the exchange.

Why has Nikola's stock been rising?

Multiple reasons have helped Nikola's stock rise from its lows. Earlier this month, the company announced that the California Transportation Commission has awarded it a $41.9 million grant for building six heavy-duty hydrogen refueling stations across Southern California.

Last week, BayoTech also agreed to buy up to 50 Class 8 hydrogen trucks from Nikola. However, I believe none of these factors justifies the giant rally in NKLA. I believe this move is due to short covering – considering the stock’s 25% short interest ratio.

Nikola has restructured its business

Nikola has restructured its business and is focusing on the North American market and cashed out of its joint venture in Europe. It has begun liquidating the assets of Romeo Power that it acquired for $144 million in 2022. It has also lowered its workforce like most of its startup EV peers and expects its annual cash usage to fall below $400 million by 2024.

During its Q1 2023 earnings call, Nikola said that its goal is to reach gross profit breakeven by the end of 2024 and EBITDA positive by 2025.

Notably, Nikola had around $131 million in cash at the end of March. It raised another $100 million in April and has since been looking to increase its authorized capital which would help it sell even more shares.

The company has adjourned its annual meeting twice but expects the proposal to increase the authorized share capital to get approved at the upcoming annual meeting in August, resting its hopes on a proposed amendment to Section 242 of the Delaware General Corporation Law.

According to Nikola, once the Delaware amendment is passed, it would only need approval from the majority of the shares actually voting on the proposal, unlike the current scenario when it needs approval from the majority of outstanding shares. It emphasized, “Under this proposed new law, if the annual meeting were to be held today, a sufficient number of shares would have been voted in favor of Proposal 2.”

Why Nikola stock looks a sell after the recent rally

Meanwhile, even as Nikola stock has soared from its all-time lows, I believe that the rally should lose steam for the following reasons.

• Raising capital is no quick fix for Nikola and if anything it leads to dilution for existing shareholders. Nikola's outstanding share count has almost doubled since its listing to nearly 716 million now and it has proposed to double its authorized shares so that it can raise more cash, which it might need to do at regular intervals given its perennial cash burn.
• Hydrogen-powered trucks, which Nikola is currently working on, are still quite a niche segment, unlike electric cars which have gained widespread adoption. Incidentally, Tesla’s (TSLA) CEO Elon Musk does not see a future for hydrogen in the green energy transition and said that it is “the most dumb thing I could possibly imagine for energy storage.” While a section of the market is bullish on hydrogen-powered vehicles also, they are relatively untested and nascent as compared to electric vehicles.
• The recent deals that Nikola has announced are not exactly a game-changer even as they signal confidence in its abilities and technology.
• Nikola’s market cap has surged to $1.8 billion while its price-to-sales multiple is around 30x now which looks on the higher side.

Wall Street is also quite bearish in NKLA stock

All six Wall Street analysts covering NKLA stock currently rate it as a Hold:

Amid the recent rally, the stock has also run ahead of its mean target price of $2.40. 

Nikola’s future would depend on its ability to raise more cash and if it is not able to raise capital, it would face trouble in funding its operations. This is where names like Lucid Motors and Rivian stand out, as they are backed by Saudi Arabia’s sovereign wealth fund and Amazon (AMZN) respectively. A strong backing helps in raising funds relatively easily and since November, Lucid Motors has raised $2.7 billion from Saudi Arabia alone.

Overall, I believe that investors should avoid Nikola stock at these prices and consider other EV startup companies – especially those which have a strong balance sheet – as the EV price war and tough market conditions do not bode well for the industry.