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Nerves of Steel Needed to Invest in Nikola (NKLA): Are You Ready?
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The hype and hoopla surrounding Nikola Corporation (NKLA - Free Report) has been crashing down and how! The stock, which was originally dubbed as the "Tesla (TSLA - Free Report) of trucking" just a little more than a few months back, now turned into a disappointing reality mired in controversies.
The electric truck upstart, which went public this year, captured the imagination of speculators and day traders who took its shares from a low near $10 per share to an intraday high of $93.99 and then back to square one, with shares now trading at around $13 per share. Over the past couple of months, Nikola’s survival and credibility has been put to question, following the scathing report from Hindenburg Research, which slapped fraud allegations on the company.
Red Flags Surrounding NKLA
Per Hindenburg’s accusations, Nikola misled investors about its electric vehicle (EV) proprietary technology stating that the same was purchased from another company, which drew the Securities and Exchange Commission’s (SEC) attention to the matter. Hindenburg claimed to have never witnessed a deception of this magnitude by a public company.
Following the fraud charges, the company’s CEO Trevor Milton resigned, which almost felt like an admission of guilt. The company failed to provide a plausible explanation to most of Hindenburg's indictments. It has indeed been no less than a nightmare for Nikola bulls, which not only drew parallels between Nikola and Tesla but also touted Milton as the next Elon Musk. At present, the comparison made between the two seems preposterous. Milton’s exaggerated promises and tall claims fell through big time, putting investors in a fix.
This massive reputational damage also prompted General Motors (GM - Free Report) to scaled down its deal with Nikola. The U.S. giant, which was set to acquire 11% stake in Nikola, backed out of the deal, which further dampened investors’ faith in the firm. Amid questions surrounding Nikola’s legitimacy, General Motors was not willing to take any risk and reworked the deal. Per the revised proposal, General Motors will only supply hydrogen fuel cells to Nikola and will no longer manufacture the Badger truck for Nikola, for which Milton had once tweeted, “the most bad ass zero emission truck”. In fact, Nikola’s Badger EV pickup project has been abandoned altogether, which comes as a huge setback for the firm.
Talks with major energy firms including BP plc (BP - Free Report) to develop hydrogen-refueling stations also fell apart amid the controversies. Last month, Nikola’s new CEO Mark Russell reaffirmed management’s goal announcing that the company’s hydrogen infrastructure partner will be finalized by 2020 end but also warned at the same time that the same could be deferred to early 2021.
The tidal wave of bad news for Nikola just does not seem to wane. Only a few days back, management announced that its deal with Republic Services to jointly develop electric garbage trucks is terminated as it might have to bear significant costs and devote longer-than-expected development time. This was another blow to investors who hoped that the deal could be a potential paradigm changer for Nikola.
It should be noted that Nikola currently does not produce or sell any of the products it plans to bring to market. For the nine months ended Sep 30, Nikola generated revenues worth $95,000 from the installation of solar panels for the ex-CEO Milton. Total operating expenses skyrocketed around 292% year over year to $236 million during the said period. Net loss widened from $62.3 million in the comparable year-ago period to $237.3 million.
Moreover, intense competition is making things all the more difficult for Nikola. With various new entrants emerging in the EV space along with major auto giants pouring in billions of dollars to shift their gears to an electric mode, Nikola does have lots to prove. While the firm aims to develop hydrogen fuel-cell powered electric trucks, and build and operate hydrogen filling stations to refuel vehicles, it’s going to be an extremely expensive undertaking and we doubt if Nikola has the required capabilities to prove its mettle. The firm neither possesses any breakthrough technology nor does it have any proven track record and fundamental strength. What it has though is a history of unfulfilled promises and tall claims, which make investors even more apprehensive.
Most industry experts had been invariably quite skeptical about Nikola’s crazy run on the bourses since it surged past Ford's (F - Free Report) valuation. How could a company that hasn't sold a single car and does not generate any meaningful revenues get more valuable than a legacy automaker like Ford, they wondered. But lofty valuations are an alarming concern for almost every EV startups currently. With FOMO-ridden retail investors jumping on the e-mobility bandwagon, the valuations of most EV pure plays spiraled out of control. Even though Nikola saw a massive correction of late, its valuation is overstretched. Currently, the stock has a P/S ratio of 106.31X compared with the industry’s 2.42X.
Is There Any Silver Lining?
Nikola is optimistic about commencing the production and sale of the Nikola Tre, a fully-electric truck, by fourth-quarter 2021. Management confirms that the company is on track with the development of its 1-million-square-foot plant in Coolidge, AZ. It expects to close the construction of Phase 1 by 2021end with the entire facility to be completed by mid-2023. However, any delays in the delivery deadline and production challenges will not be much of a surprise. Although the company redesigned its strategy and firmly stated that it “remains committed to achieving” a set of milestones originally configured by it, investors will take time to reinstate their faith in the company.
This month, Nikola announced that it entered into an agreement with an Arizona-based utility to procure electricity it requires for producing low-cost hydrogen for its fueling network. The contract is due for an approval from the state utility regulators. If the deal gets through, it will be a breather for Nikola as its business plan will be guided by its ability to produce hydrogen fuel efficiently.
On a positive note, Nikola displays high liquidity and almost nil leverage. Nonetheless, even though it fares well in terms of financials, its image got tarnished and the stock seems to be headed for witnessing negative returns.
Wrapping Up
Well, there are not many companies that managed to generate as much publicity and controversies in 2020 as the EV/hydrogen truck upstart Nikola. It certainly has been a checkered fortune for the Nikola stock so far in the year, which is ending it on a painful note for investors. The recent slew of unwelcoming events seemingly hindered the company’s ambitious EV plans. It is becoming increasingly difficult to justify Nikola’s current market cap of around $6 billion. The company is yet to even display a functional vehicle and with its partnerships looking to be in shambles, its best to avoid any position in the currently Zacks Rank #3 (Hold) stock as of now. While Nikola may come out of the woods in the long term, but it’s definitely much too early to invest in the stock at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Top 10 Stocks for 2021
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?
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Nerves of Steel Needed to Invest in Nikola (NKLA): Are You Ready?
The hype and hoopla surrounding Nikola Corporation (NKLA - Free Report) has been crashing down and how! The stock, which was originally dubbed as the "Tesla (TSLA - Free Report) of trucking" just a little more than a few months back, now turned into a disappointing reality mired in controversies.
The electric truck upstart, which went public this year, captured the imagination of speculators and day traders who took its shares from a low near $10 per share to an intraday high of $93.99 and then back to square one, with shares now trading at around $13 per share. Over the past couple of months, Nikola’s survival and credibility has been put to question, following the scathing report from Hindenburg Research, which slapped fraud allegations on the company.
Red Flags Surrounding NKLA
Per Hindenburg’s accusations, Nikola misled investors about its electric vehicle (EV) proprietary technology stating that the same was purchased from another company, which drew the Securities and Exchange Commission’s (SEC) attention to the matter. Hindenburg claimed to have never witnessed a deception of this magnitude by a public company.
Following the fraud charges, the company’s CEO Trevor Milton resigned, which almost felt like an admission of guilt. The company failed to provide a plausible explanation to most of Hindenburg's indictments. It has indeed been no less than a nightmare for Nikola bulls, which not only drew parallels between Nikola and Tesla but also touted Milton as the next Elon Musk. At present, the comparison made between the two seems preposterous. Milton’s exaggerated promises and tall claims fell through big time, putting investors in a fix.
This massive reputational damage also prompted General Motors (GM - Free Report) to scaled down its deal with Nikola. The U.S. giant, which was set to acquire 11% stake in Nikola, backed out of the deal, which further dampened investors’ faith in the firm. Amid questions surrounding Nikola’s legitimacy, General Motors was not willing to take any risk and reworked the deal. Per the revised proposal, General Motors will only supply hydrogen fuel cells to Nikola and will no longer manufacture the Badger truck for Nikola, for which Milton had once tweeted, “the most bad ass zero emission truck”. In fact, Nikola’s Badger EV pickup project has been abandoned altogether, which comes as a huge setback for the firm.
Talks with major energy firms including BP plc (BP - Free Report) to develop hydrogen-refueling stations also fell apart amid the controversies. Last month, Nikola’s new CEO Mark Russell reaffirmed management’s goal announcing that the company’s hydrogen infrastructure partner will be finalized by 2020 end but also warned at the same time that the same could be deferred to early 2021.
The tidal wave of bad news for Nikola just does not seem to wane. Only a few days back, management announced that its deal with Republic Services to jointly develop electric garbage trucks is terminated as it might have to bear significant costs and devote longer-than-expected development time. This was another blow to investors who hoped that the deal could be a potential paradigm changer for Nikola.
It should be noted that Nikola currently does not produce or sell any of the products it plans to bring to market. For the nine months ended Sep 30, Nikola generated revenues worth $95,000 from the installation of solar panels for the ex-CEO Milton. Total operating expenses skyrocketed around 292% year over year to $236 million during the said period. Net loss widened from $62.3 million in the comparable year-ago period to $237.3 million.
Moreover, intense competition is making things all the more difficult for Nikola. With various new entrants emerging in the EV space along with major auto giants pouring in billions of dollars to shift their gears to an electric mode, Nikola does have lots to prove. While the firm aims to develop hydrogen fuel-cell powered electric trucks, and build and operate hydrogen filling stations to refuel vehicles, it’s going to be an extremely expensive undertaking and we doubt if Nikola has the required capabilities to prove its mettle. The firm neither possesses any breakthrough technology nor does it have any proven track record and fundamental strength. What it has though is a history of unfulfilled promises and tall claims, which make investors even more apprehensive.
Most industry experts had been invariably quite skeptical about Nikola’s crazy run on the bourses since it surged past Ford's (F - Free Report) valuation. How could a company that hasn't sold a single car and does not generate any meaningful revenues get more valuable than a legacy automaker like Ford, they wondered. But lofty valuations are an alarming concern for almost every EV startups currently. With FOMO-ridden retail investors jumping on the e-mobility bandwagon, the valuations of most EV pure plays spiraled out of control. Even though Nikola saw a massive correction of late, its valuation is overstretched. Currently, the stock has a P/S ratio of 106.31X compared with the industry’s 2.42X.
Is There Any Silver Lining?
Nikola is optimistic about commencing the production and sale of the Nikola Tre, a fully-electric truck, by fourth-quarter 2021. Management confirms that the company is on track with the development of its 1-million-square-foot plant in Coolidge, AZ. It expects to close the construction of Phase 1 by 2021end with the entire facility to be completed by mid-2023. However, any delays in the delivery deadline and production challenges will not be much of a surprise. Although the company redesigned its strategy and firmly stated that it “remains committed to achieving” a set of milestones originally configured by it, investors will take time to reinstate their faith in the company.
This month, Nikola announced that it entered into an agreement with an Arizona-based utility to procure electricity it requires for producing low-cost hydrogen for its fueling network. The contract is due for an approval from the state utility regulators. If the deal gets through, it will be a breather for Nikola as its business plan will be guided by its ability to produce hydrogen fuel efficiently.
On a positive note, Nikola displays high liquidity and almost nil leverage. Nonetheless, even though it fares well in terms of financials, its image got tarnished and the stock seems to be headed for witnessing negative returns.
Wrapping Up
Well, there are not many companies that managed to generate as much publicity and controversies in 2020 as the EV/hydrogen truck upstart Nikola. It certainly has been a checkered fortune for the Nikola stock so far in the year, which is ending it on a painful note for investors. The recent slew of unwelcoming events seemingly hindered the company’s ambitious EV plans. It is becoming increasingly difficult to justify Nikola’s current market cap of around $6 billion. The company is yet to even display a functional vehicle and with its partnerships looking to be in shambles, its best to avoid any position in the currently Zacks Rank #3 (Hold) stock as of now. While Nikola may come out of the woods in the long term, but it’s definitely much too early to invest in the stock at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Top 10 Stocks for 2021
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>