Nikola (NKLA) Shares a Deal After Hitting an All-Time Low?
The electric truck upstart Nikola Corp NKLA went public on Nasdaq after a reverse merger with VectoIQ on Jun 3, 2020. Once dubbed as the "Tesla of trucking," the hype and hoopla over the stock has crashed drastically, leaving investors in a sad state. Shareholders are worried about the company’s financial troubles, alarming cash burn rates, weak 2022 results and soft 2023 guidance.
Adding to the woes of investors, Nikola announced a $100 million stock offering on Friday. This marked the second round of stock sale in less than a year. Post Nikola’s $100 million stock sale plans, the shares of the company tanked 13.7%, sinking to a record low of $1.15/share to close the session at $1.21 on Mar 31. Is this a buying opportunity? Does Nikola have enough tailwinds that you can still bet on it when it's trading dirt cheap? Can the company turn things around? Or is Nikola doomed to fail? Let’s see.
NKLA’s Checkered History
In 2020, a number of green vehicle makers debuted through the SPAC merger route to capitalize on the EV frenzy. Nikola was among the first EV SPACs. The company garnered massive attention from investors initially on the back of promising future developments and the EV euphoria, so much so that the market cap of Nikola topped Ford’s in June 2020. But the momentum could not be sustained.
Within a few months of going public, the company's survival seemed difficult following Hindenburg Research's strongly-worded report about Nikola misleading investors. Following the fraud charges, the company’s then CEO Trevor Milton resigned, which almost felt like an admission of guilt. Hindenburg's accusation, combined with Milton's "early retirement," has many of Nikola's potential partners questioning the business's legitimacy. Speculators and day traders took NKLA’s shares from the 2020 high of $93.99 attained on Jun 9 to a low of $13.51 on Dec 24.
After a tumultuous 2020, Nikola failed to make much progress in 2021. The stock tumbled another 38% in 2021. In December 2021, Nikola was charged a $125 million penalty to be paid to the United States Securities and Exchange Commission (“SEC”) over the purported misleading statements about the company’s capabilities made by Milton.
Inflationary pressures and severe supply chain snarls made things worse for Nikola in 2022, with the stock cratering around 79%. Being in its nascent stage, Nikola has failed to achieve economies of scale and has been suffering losses on Tre BEV truck due to absurdly high production costs. The company incurred a net loss of $784 million in 2022, wider than $690 million in 2021 as elevated manufacturing costs and supply bottlenecks hurt the company, especially when demand was also hit amid surging inflation.
Bumpy Ride to Continue
Nikola anticipates its 2023 gross margin in the range of negative 75-95%. On its third-quarter 2023 earnings call, Nikola acknowledged that the uptake of battery electric semi-trucks was turning out to be slower than expected due to a number of issues, including significant charging infrastructure challenges. Nikola's finance chief doesn’t expect these challenges to be abated anytime soon.
What spooked the 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 in business a year from now.
Here’s what the filing stated. “Our ability to continue as a going concern is dependent on our ability to obtain the necessary financing to meet our obligations and repay our liabilities arising from the ordinary course of business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time. If we are unable to raise sufficient capital when needed, our business, financial condition and results of operations will be materially and adversely affected, and we will need to significantly modify or terminate our operations and our planned business activities.”
Nikola ended 2022 with cash/cash equivalents of 233.4 million, which plunged from $497.2 million as of 2021 end. At the midpoint of its guidance, the company expects to spend approximately 635 million this year, including gross loss on truck sales, R&D and SG&A costs, net of stock-based compensation, and capital outlay.
Given its elevated liquidity requirements and a rather short financial runway, Nikola is likely to remain in hot water. In an attempt to shore up cash reserves, the company announced a $100 million stock sale on Friday. Citigroup is the underwriter for the issue. Nikola said it will price shares at $1.12/apiece, at a discount to its Thursday’s closing price of $1.40. Citigroup has the option to purchase another $15 million worth of shares. In case the stock offering is unsuccessful, Nikola said it would sell shares to an unnamed private investor in a private placement.
Even if the company manages to raise sufficient capital to make it into 2024, shareholders will suffer from outsized dilution. Despite the cash injection, management has got much to do to balance its massive cash burn against its existing funds.
Is There Any Ray of Hope?
Currently the company has just one offering, the Tre BEV. But it is on track to begin deliveries of its second offering Tre FCEVin the second half of2023, which should help improve its sales and product portfolio. Nikola expects to deliver 250-350 Tre BEVs in 2023 and 125-150 Tre FCEVs in the second half of this year. In January, the company launched HYLA, its new hydrogen energy brand, which would offer integrated and innovative energy solutions to customers.
Nikola has set for itself some ambitious long-term targets. By 2026, the firm targets to have around 60 refueling stations. It expects at least 20 stations in California itself by 2026. Currently, it has just four stations in the state. It is aiming for 300 metric tons of hydrogen production/day by 2026, which could fuel up to 7,500 trucks per day. And if there’s enough demand, the firm envisions to generate approximately $450-500 million in hydrogen revenue selling to Nikola FCEV and third-party customers.
Importantly, Nikola forecasts sales of approximately 1,000-1,250 Tre BEVs and 5,000-6,000 Tre FCEV, with total truck deliveries of 6,000-7,250 units by 2026. It aims to achieve a positive gross profit margin by next year and break even to positive EBITDA in 2025.
Final Word
Well, these goals seem too lofty as of now. Yes, the company has redesigned its strategy and 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.
Given the fierce competition in the EV space and macroeconomic challenges along with the company’s financial troubles, there is a lot of uncertainty surrounding Nikola’s future. Considering its overly ambitious goals, it would be prudent for investors to give the stock time to prove its mettle rather than jumping into buying the dip. Nikola needs to demonstrate tangible progress in the next 15-20 months if it wants to get into the good books of investors again. Till then, cautious and prudent investors should employ a “wait and see” approach on the stock.
Zacks Rank and Key Picks
Nikola currently carries a Zacks Rank #3 (Hold).
Better-ranked players in the auto space include Polaris Inc. PII, General Motors GM and Blue Bird BLBD. While PII sports a Zacks Rank #1 (Strong Buy), GM and BLBD carry a Zacks Rank #2 (Buy).
Polaris designs, engineers and manufactures off-road and on-road vehicles. The Zacks Consensus Estimate for PII’s 2023 EPS has moved north by 8 cents in the past seven days. The same for 2024 EPS has gone up by 3 cents over the past seven days and implies year-over-year growth of 1%. Polaris currently has a VGM Score of A.
General Motors is one of the world’s largest automakers, which held the largest share of the U.S. auto market at 17.09% in 2022. The Zacks Consensus Estimate for GM’s 2023 EPS has moved north by 41 cents in the past 60 days. The same for 2024 EPS has gone up by 92 cents over the past 60 days. The company currently carries a VGM Score of A.
Blue Bird is engaged in the designing, engineering, manufacturing and sale of school buses and related parts. The Zacks Consensus Estimate for BLBD’s fiscal 2023 and 2024 sales implies year-over-year growth of 24% and 26%, respectively. The consensus mark for fiscal 2023 and 2024 EPS implies year-over-year growth of 140% and 227%, respectively. Blue Bird currently has a VGM Score of B.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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