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Nikola (NKLA) on Sale: Tempting Deal or Risky Bet?
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The electric truck startup Nikola Corp (NKLA - Free Report) made its debut on Nasdaq on Jun 4, 2020 after completing a reverse merger with VectoIQ. The initial excitement surrounding the company was palpable, with the stock commencing trading at $37.55 per share and reaching an all-time high of $93.99 on Jun 9, 2020.
Once dubbed as the "Tesla of trucking," the hype over the stock has crashed drastically, leaving investors in a sad state.NKLA is currently trading at slightly above $1 per share, a significant decline from its earlier heights.
The question arises whether this steep decline in NKLA's stock price presents a promising buying opportunity or a sinking ship from which to steer clear. Does it still have the potential to make a turnaround or is it destined to fail?
NKLA’s Rollercoaster Narrative
In 2020, various green vehicle makers entered the market via SPAC mergers to benefit from the electric vehicle (EV) frenzy, including Nikola. Initially, Nikola gained substantial attention and even surpassed Ford's market cap due to EV optimism. However, the momentum waned after Hindenburg Research's report raised concerns about misleading information, resulting in CEO Trevor Milton's resignation. The stock dropped from a high of $93.99 attained on Jun 9 to a low of $13.51 on Dec 24.
In 2021, Nikola's stock plummeted 38%, and by December, the United States Securities and Exchange Commission (“SEC”) charged the company $125 million for purported misleading statements about its capabilities made by Milton. Challenges continued in 2022, causing a 79% stock decline and a $784 million net loss as elevated manufacturing costs and supply bottlenecks hurt the company, especially when demand was also hit by surging inflation.
What spooked investors even more was the going concern warning by the company. In its 10-K SEC filing for 2022, Nikola said it may not have enough money to stay afloat for a year.
However, Nikola experienced a momentary upswing this year due to several favorable developments last month. The company announced an increase in deliveries of its battery electric vehicles (BEVs), with retail sales doubling sequentially in the second quarter of 2023 to 66 units, and wholesale figures rising from 31 to 45.
It also reaffirmed its target to deliver its inaugural hydrogen-powered fuel cell electric vehicles (FCEVs) this year. It secured a five-year order for 50 FCEVs from BayoTech. J.B. Hunt Transport's purchase agreement of 13 Nikola zero-emission Class 8 trucks sparked further optimism. The California Transportation Commission approved a $42 million grant to fund Nikola’s construction of six hydrogen stations in Southern California. This was further complemented by $16.3 million in additional grants announced on Aug 1. These factors took Nikola from its record low of 52 cents a share on Jun 6 to this year's peak of $3.71 on Aug 3.
Recent Setbacks in NKLA’s Path
Disappointing Projections: In its second-quarter report released on Aug 4, Nikola slashed its 2023 outlook. Revenue projections for 2023 narrowed to $100-130 million from $140-200 million guided earlier. The forecast for truck deliveries was cut to 300-400 units from the prior expectation of 375-600 units. Gross margin is now anticipated to be negative 110%, worse than the previous expectation of negative 95%. Management cited extended lead times and scaling issues for the trimmed guidance. The company anticipates cash usage of $220 million in the second half 2023, which suggests a potential need for capital raising by year-end or early 2024.
Abrupt Leadership Changes: Nikola's second-quarter report revealed CEO Michael Lohscheller's sudden departure due to family health concerns. He was a driving force behind recent improvements, elevating BEV production and bolstering FCEV efforts while stabilizing the balance sheet. Replaced by Steve Girsky, Lohscheller's exit marked the third CEO change in a year. Additionally, Carey Mendes, responsible for Nikola's hydrogen branding and fueling station financing, also resigned. Late last week, Nikola announced his departure through a SEC filing while refraining from publicly disclosing a successor.
The Recall Dilemma: In June, several of Nikola's BEVs ignited at its Phoenix site, with the company initially suggesting foul play for potential stock manipulation. The Phoenix Fire Department's investigation found no evidence of arson. One truck that had burned reignited in July. On Aug 11, Nikola recalled about 209 Class 8 Tre BEVs, admitting the fires were due to a coolant leak within a battery pack, dismissing the notion of foul play. The company's initial reaction to attribute fires to "foul play" raises concerns about its transparency and management decisions, further compounding the company's uphill battle to regain stability and rebuild trust.
Delivery Targets at Risk: Nikola also noted potential challenges in achieving its annual delivery goal amid the recall aftermath. In a regulatory filing on Aug 21, the company acknowledged the possibility of significant expenses to fix or replace the faulty part. It also expressed concerns over potential adverse effects on the brand, business, financials and cash flows. Nikola has suspended sales of new BEVs entirely. This recall is expected to hinder Nikola from reaching its target of delivering 250 to 300 BEVs for the year, also potentially disrupting the planned FCEV rollout.
Convertible Bond Deal: Nikola's move to raise funds has stirred further unease among investors. The company plans to issue convertible bonds worth up to $325 million, with the initial closing expected to bring in around $125 million. Although it will provide an immediate financial boost, it will also lead to share dilution as bonds are converted into shares, potentially affecting the stock's value.
Is it Worth the Risk?
With NKLA shares trading dirt cheap now, it could represent a buying opportunity only for those who believe in the company’s long-term vision. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The investment case for Nikola revolves around the growth prospects of the hydrogen fuel economy. While investing in the company now is speculative in nature, Nikola's ambitious long-term targets indicate its intentions to establish a significant presence in hydrogen refueling infrastructure. By 2026, Nikola aims 60 refueling stations, including 20 in California, and 300 metric tons of daily hydrogen production. This could power 7,500 trucks per day, generating $450-500 million in hydrogen revenues. It guided 1,000-1,250 Tre BEV and 5,000-6,000 Tre FCEV sales, which will take total truck deliveries to 6,000-7,250 units by 2026. The company targets a positive gross profit margin in the near term and aims for breakeven to positive EBITDA by 2025.
But to most, these goals may seem too lofty as of now.Skepticism surrounds these goals, given the recent management changes, underwhelming near-term prospects and the challenge of aligning aggressive financial projections with the current business headwinds of the company. And it will take time for Nikola to regain market confidence and translate its aspirations into substantial results.
Investors are likely to remain concerned about near-term execution and mid-term targets, especially with the departure of key management members. While the focus on reducing cash burn is evident from the latest quarterly release, rebuilding investor trust and demonstrating tangible progress will take time. The prospects of increased open market sales and convertible notes also cast a shadow over the stock's short-term trajectory. While Nikola's long-term goals are alluring, a prudent investor should exercise caution for the time being.
The Zacks Consensus Estimate for GNTX’s 2023 sales and EPS implies year-over-year growth of 17.3% and 29.4%, respectively. The earnings estimate for 2023 has been revised upward by 7 cents in the past 30 days.
The Zacks Consensus Estimate for CVGI’s 2023 sales and EPS implies year-over-year growth of 4.05% and 102%, respectively. The earnings estimate for 2023 has been revised upward by 8 cents in the past 30 days.
The Zacks Consensus Estimate for ALSN’s 2023 sales and EPS implies year-over-year growth of 9.4% and 25.3%, respectively. The earnings estimate for 2023 has been revised upward by 39 cents in the past 30 days.
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Nikola (NKLA) on Sale: Tempting Deal or Risky Bet?
The electric truck startup Nikola Corp (NKLA - Free Report) made its debut on Nasdaq on Jun 4, 2020 after completing a reverse merger with VectoIQ. The initial excitement surrounding the company was palpable, with the stock commencing trading at $37.55 per share and reaching an all-time high of $93.99 on Jun 9, 2020.
Once dubbed as the "Tesla of trucking," the hype over the stock has crashed drastically, leaving investors in a sad state.NKLA is currently trading at slightly above $1 per share, a significant decline from its earlier heights.
The question arises whether this steep decline in NKLA's stock price presents a promising buying opportunity or a sinking ship from which to steer clear. Does it still have the potential to make a turnaround or is it destined to fail?
NKLA’s Rollercoaster Narrative
In 2020, various green vehicle makers entered the market via SPAC mergers to benefit from the electric vehicle (EV) frenzy, including Nikola. Initially, Nikola gained substantial attention and even surpassed Ford's market cap due to EV optimism. However, the momentum waned after Hindenburg Research's report raised concerns about misleading information, resulting in CEO Trevor Milton's resignation. The stock dropped from a high of $93.99 attained on Jun 9 to a low of $13.51 on Dec 24.
In 2021, Nikola's stock plummeted 38%, and by December, the United States Securities and Exchange Commission (“SEC”) charged the company $125 million for purported misleading statements about its capabilities made by Milton. Challenges continued in 2022, causing a 79% stock decline and a $784 million net loss as elevated manufacturing costs and supply bottlenecks hurt the company, especially when demand was also hit by surging inflation.
What spooked investors even more was the going concern warning by the company. In its 10-K SEC filing for 2022, Nikola said it may not have enough money to stay afloat for a year.
However, Nikola experienced a momentary upswing this year due to several favorable developments last month. The company announced an increase in deliveries of its battery electric vehicles (BEVs), with retail sales doubling sequentially in the second quarter of 2023 to 66 units, and wholesale figures rising from 31 to 45.
It also reaffirmed its target to deliver its inaugural hydrogen-powered fuel cell electric vehicles (FCEVs) this year. It secured a five-year order for 50 FCEVs from BayoTech. J.B. Hunt Transport's purchase agreement of 13 Nikola zero-emission Class 8 trucks sparked further optimism. The California Transportation Commission approved a $42 million grant to fund Nikola’s construction of six hydrogen stations in Southern California. This was further complemented by $16.3 million in additional grants announced on Aug 1. These factors took Nikola from its record low of 52 cents a share on Jun 6 to this year's peak of $3.71 on Aug 3.
Recent Setbacks in NKLA’s Path
Disappointing Projections: In its second-quarter report released on Aug 4, Nikola slashed its 2023 outlook. Revenue projections for 2023 narrowed to $100-130 million from $140-200 million guided earlier. The forecast for truck deliveries was cut to 300-400 units from the prior expectation of 375-600 units. Gross margin is now anticipated to be negative 110%, worse than the previous expectation of negative 95%. Management cited extended lead times and scaling issues for the trimmed guidance. The company anticipates cash usage of $220 million in the second half 2023, which suggests a potential need for capital raising by year-end or early 2024.
Abrupt Leadership Changes: Nikola's second-quarter report revealed CEO Michael Lohscheller's sudden departure due to family health concerns. He was a driving force behind recent improvements, elevating BEV production and bolstering FCEV efforts while stabilizing the balance sheet. Replaced by Steve Girsky, Lohscheller's exit marked the third CEO change in a year. Additionally, Carey Mendes, responsible for Nikola's hydrogen branding and fueling station financing, also resigned. Late last week, Nikola announced his departure through a SEC filing while refraining from publicly disclosing a successor.
The Recall Dilemma: In June, several of Nikola's BEVs ignited at its Phoenix site, with the company initially suggesting foul play for potential stock manipulation. The Phoenix Fire Department's investigation found no evidence of arson. One truck that had burned reignited in July. On Aug 11, Nikola recalled about 209 Class 8 Tre BEVs, admitting the fires were due to a coolant leak within a battery pack, dismissing the notion of foul play. The company's initial reaction to attribute fires to "foul play" raises concerns about its transparency and management decisions, further compounding the company's uphill battle to regain stability and rebuild trust.
Delivery Targets at Risk: Nikola also noted potential challenges in achieving its annual delivery goal amid the recall aftermath. In a regulatory filing on Aug 21, the company acknowledged the possibility of significant expenses to fix or replace the faulty part. It also expressed concerns over potential adverse effects on the brand, business, financials and cash flows. Nikola has suspended sales of new BEVs entirely. This recall is expected to hinder Nikola from reaching its target of delivering 250 to 300 BEVs for the year, also potentially disrupting the planned FCEV rollout.
Convertible Bond Deal: Nikola's move to raise funds has stirred further unease among investors. The company plans to issue convertible bonds worth up to $325 million, with the initial closing expected to bring in around $125 million. Although it will provide an immediate financial boost, it will also lead to share dilution as bonds are converted into shares, potentially affecting the stock's value.
Is it Worth the Risk?
With NKLA shares trading dirt cheap now, it could represent a buying opportunity only for those who believe in the company’s long-term vision. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The investment case for Nikola revolves around the growth prospects of the hydrogen fuel economy. While investing in the company now is speculative in nature, Nikola's ambitious long-term targets indicate its intentions to establish a significant presence in hydrogen refueling infrastructure. By 2026, Nikola aims 60 refueling stations, including 20 in California, and 300 metric tons of daily hydrogen production. This could power 7,500 trucks per day, generating $450-500 million in hydrogen revenues. It guided 1,000-1,250 Tre BEV and 5,000-6,000 Tre FCEV sales, which will take total truck deliveries to 6,000-7,250 units by 2026. The company targets a positive gross profit margin in the near term and aims for breakeven to positive EBITDA by 2025.
But to most, these goals may seem too lofty as of now.Skepticism surrounds these goals, given the recent management changes, underwhelming near-term prospects and the challenge of aligning aggressive financial projections with the current business headwinds of the company. And it will take time for Nikola to regain market confidence and translate its aspirations into substantial results.
Investors are likely to remain concerned about near-term execution and mid-term targets, especially with the departure of key management members. While the focus on reducing cash burn is evident from the latest quarterly release, rebuilding investor trust and demonstrating tangible progress will take time. The prospects of increased open market sales and convertible notes also cast a shadow over the stock's short-term trajectory. While Nikola's long-term goals are alluring, a prudent investor should exercise caution for the time being.
Top-Ranked Players From the Auto Space
A few top-ranked stocks in the auto space include Gentex (GNTX - Free Report) , Commercial Vehicle Group (CVGI - Free Report) and Allison Transmission (ALSN - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for GNTX’s 2023 sales and EPS implies year-over-year growth of 17.3% and 29.4%, respectively. The earnings estimate for 2023 has been revised upward by 7 cents in the past 30 days.
The Zacks Consensus Estimate for CVGI’s 2023 sales and EPS implies year-over-year growth of 4.05% and 102%, respectively. The earnings estimate for 2023 has been revised upward by 8 cents in the past 30 days.
The Zacks Consensus Estimate for ALSN’s 2023 sales and EPS implies year-over-year growth of 9.4% and 25.3%, respectively. The earnings estimate for 2023 has been revised upward by 39 cents in the past 30 days.