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Will Nikola (NKLA) Be Back On An Even Keel This Year?

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It’s been a rollercoaster ride for Nikola Corporation (NKLA - Free Report) since it went public on Jun 3, 2020. Shares of the electric vehicle (EV) startup hit a record high of $93.99 on Jun 9, 2020 amid the EV madness, as FOMO-ridden retail investors were betting big on the future of e-mobility, with little regard to companies’ fundamentals. But it didn’t take too long for Nikola’s shares to fall rapidly after the company was accused of fraud in September 2020. Since then, the firm’s credibility has been put into question. Nikola’s founder Trevor Milton was indicted in July 2021 by a federal grand jury on allegations of lying about “nearly all aspects of the business.”

Nikola’s shares ended the last trading session of 2021 at $9.87, 90% off its all-time high attained in June 2020. With the company managing to pull itself out of the legal challenges late last month, will Nikola see stability in 2022? Would the recent spree of encouraging deals help the company regain some lost ground this year? And is the stock worth a wager now after its settlement agreement with SEC? Or is it still too early for investors to put their money on NKLA, considering the potential risks, no proven track record and a bitter past? 

A Quick Background of the Controversy

It all started in September 2020, when a short-selling firm Hindenburg Research published a report accusing Nikola of a series of fraud in showcasing its EV technology. Following the strongly-worded report about the company misleading investors, Milton resigned, which almost felt like an admission of guilt. Hindenburg's accusation, combined with Milton's "early retirement," left many of Nikola's potential partners questioning the business legitimacy. Milton’s exaggerated promises and tall claims fell through big time, tarnishing the company’s reputation and putting investors in a fix.

Nikola was reeling under a double whammy of disaster with an enormously stretched valuation from overexcited investors and traders coupled with what seemed to be a mounting securities fraud situation that halted the firm’s ability to conduct business. Last year, Milton was indicted with three counts of criminal fraud. While Milton pleaded not guilty of the fraud charges, the regulatory probe weighed on the stock significantly.

It was just last month that Nikola finally breathed a sigh of relief, as it agreed to pay the SEC a $125-million penalty, which freed the company of further investigations. The penalty has to be made in five installments over the next two years. The first installment was scheduled at 2021-end and the remaining will be paid semiannually through 2023. The company stated that the “settlement resolves and concludes all government investigations of Nikola.” NKLA neither admitted to nor denied the allegations.

A Slew of Positive Developments

Indeed, the controversial chapter has come to a close but it has left a scar that might not be too easy to forget until the company proves its mettle.

That being said, Nikola is lately grabbing headlines for positive reasons, be it the delivery of its first electric truck, or a flurry of supply purchase agreements, or the approval of its Tre BEV as a zero-emission vehicle by the California Air Resources Board (‘CARB’).

NKLA hit a major milestone last month with the delivery of its first Nikola Tre battery-electric vehicle (BEV) pilot trucks to Total Transportation Services Inc. (“TTSI”). TTSI issued a letter of intention (LOI) for 100 trucks (30 in 2022 and 70 in 2023) based on satisfactory completion of the vehicle trials. Last month, Nikola also received an initial order for 10 Tre BEV trucks from Heniff Transportation Services. Per the deal, the companies agreed to pursue the placement of an additional 90 trucks into Heniff’s fleet once the initial deployment of 10 units is completed successfully.

So far this year, Nikola has inked agreements with USA Truck, Saia LTL Freight and Covenant Logistics Group for its heavy-duty Tre BEV trucks. USA Truck inked an LOI for the initial purchase of 10 trucks, with the option of purchasing an additional 90 trucks over the next two years. SAIA signed an LOI to purchase 100 Nikola Tre trucks following the successful completion of a demonstration program, which is supposed to begin in first-half 2022. Covenant has signed an LOI for 10 Nikola Tre BEVs and 40 Nikola Tre fuel cell electric vehicles (FCEVs) upon the successful completion of a Nikola Tre BEV and Nikola Tre FCEV demonstration program.

In another encouraging news, Nikola Tre BEV was approved by the CARB for the Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project ("HVIP") program. The approval allows vehicle purchasers to be eligible for an incentive worth $120,000 per truck. The Nikola Tre BEV, having a range of up to 350 miles, is expected to have the longest range among the current HVIP eligible Class 8 tractors.

A couple of days back, Nikola announced a multi-year agreement with Proterra, per which the latter would power NikolaTre BEV and Tre FCEV with Proterra battery technology. The first Proterra-powered Nikola is expected to be manufactured in fourth-quarter 2022.  

Potential Risks Ahead

Sure, Nikola seems to have made a promising start this year, with various companies placing orders for Tre BEV. While a string of collaborations provides a ray of hope, NKLA still faces an uphill battle ahead. Its trucks need to pass initial tests with commercial customers. After that, it depends on the company’s ability to ramp up production to keep pace with the follow-up orders. This could become particularly challenging amid the global chip crunch, which might delay the commercial production of Nikola’s trucks. Also, the electrification of light vehicles is getting prioritized over heavy-duty counterparts amid this chip crisis.

High commodity and operational costs will also play a spoilsport. As a matter of fact, Nikola neither possesses any breakthrough technology nor a first-mover advantage. It does not have a proven track record either. What it has, though is a history of unfulfilled promises and lots to prove. 

Nikola is not generating meaningful revenues yet and is still months away from the production of electric trucks for commercial sales. Also, it remains to be seen how its pilot trucks are received by customers. Considering the afore-mentioned concerns, Nikola doesn’t seem convincing enough.

Current Dip is Not a Buying Opportunity

Shares of Nikola have plunged 20.7% in the last three trading days. There wasn’t any negative piece of company-specific news that could have caused the decline. The stock took a beating amid the broader sell-off in high-growth tech stocks, as bond yields hit a two-year high on Jan 18. In fact, Nikola hit an all-time low yesterday, ending the session at $7.99. Could the dip be a buying opportunity? We don’t think so, in the light of potential risks surrounding the firm. Investors should at least wait until the real-world tests by potential customers confirm that Nikola’s trucks are road-ready. Even if things go well, it would still take at least a couple of years for the company to mass-produce and generate substantial revenues. So, hitting a buy button on the stock just yet doesn’t seem right. For risk-tolerant investors who already own NKLA’s shares, stay patient and wait for the scandal-tarred stock to get back on track.

Parting Thoughts

We could just hope that 2022 marks the beginning of a fresh phase for Nikola, devoid of any controversies. But the company has a long road ahead to build a strong name for itself in an overcrowded EV market.

All eyes are on Nikola’s Q4 and full-year 2021 results, scheduled to release on Feb 24. Only then will investors will get some meaningful insight into the company’s turnaround efforts and financial projections.

While Nikola currently carries a Zacks Rank #3 (Hold), here are two top-ranked stocks that you can invest in if you want to play the EV boom and reap handsome rewards.

Tesla (TSLA - Free Report) : Tesla is riding on the rising demand for Models 3 and Y. The EV king hit an incredible milestone in third-quarter 2021, with record deliveries and production. Fourth-quarter 2021 marked the sixth consecutive quarter of record deliveries by the world's most valuable automaker. Over a multi-year horizon, Tesla anticipates achieving 50% average annual growth in vehicle deliveries.

TSLA currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for Tesla’s 2022 earnings and sales implies year-over-year growth of 33% and 44%, respectively.

Ford (F - Free Report) : This legacy automaker is hitting all the right notes toward an electrified future. While Mustang Mach-E has already become a hit among consumers and is boosting the company’s sales, the much-awaited electric version of the hot-selling pickup F-150 is set to further fuel Ford’s prospects. Ford’s efforts to boost its battery technology, proprietary software and hardware stack named Blue Oval Intelligence, and joint venture deals with SK innovation offer growth visibility.

F currently sports a Zacks Rank #1. The Zacks Consensus Estimate for Ford’s 2022 earnings and sales implies year-over-year growth of 5% and 13%, respectively.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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