Summary
Nikola Corporation is a $1.6 billion EV company that develops energy and transportation solutions [primarily trucks].
Shares of Nikola have doubled in the last month due to a massive short covering triggered by recent positive news about a new contract to supply 50 hydrogen trucks.
Wall Street is painting a successful future for the company in terms of year-over-year revenue growth, which I doubt.
Even against the backdrop of strong revenue projections, NKLA's EPS will still be negative for at least another 4 years.
I urge investors and speculators to think about closing their long positions while the market still gives them the opportunity to do so at the current unrealistic prices.
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Thesis
Shares of Nikola Corporation $Nikola Corporation(NKLA)$ have doubled in the last month due to a massive short covering triggered by recent positive news about a new contract to supply 50 hydrogen trucks to BayoTech over the next 5 years.
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In my opinion, the recent good news does not dramatically change the situation for the company - the projected growth rates look too good to be true in my opinion. So I recommend investors and speculators close their positions and take advantage of the recent strong rally.
Why Do I Think So?
Nikola Corporation is a $1.6-billion technology company that develops energy and transportation solutions. They create electric and hydrogen-powered trucks, build hydrogen fueling stations, and provide charging solutions for electric vehicles. Founded in 2015, they are headquartered in Phoenix, Arizona.
Today, Nikola is a deeply unprofitable company that calls itself "a "pioneer in zero-emission Class 8 truck space" Without getting into the financials right now, however, I want to immediately clarify the situation in this market segment. The truth is that it does not matter who is a pioneer anywhere - what matters more is who and how soon will be able to become a market leader.
Nikola's zero-emission Class 8 trucks are far from the only ones if we look into the near future and look at the pipeline projects of other automakers.
For example, Tesla $Tesla Motors(TSLA)$ is one of the most well-known companies in the electric vehicle space, and they are also working on a Class 8 truck. The Tesla Semi is expected to have a range of up to 500 miles and be able to tow up to 80,000 pounds.
Volvo Trucks is a Swedish company that is a leader in the commercial truck market, and they also have some EVs in their lineup, including the Volvo VNR Electric and the Volvo FL Electric.
Daimler Truck Holding AG $DAIMLER TRUCK HLDG AG(DTRUY)$, a subsidiary of Daimler AG, is one of the largest truck manufacturers in the world; it also has several electric trucks in development, including the Freightliner eCascadia and the Western Star 49XEV.
Hyundai Trucks is a South Korean company that is working on its XCIENT Fuel Cell and the HDC-6 Electric.
The demand for zero-emission trucks is growing, and as you can see, many automakers are not willing to simply leave this niche to the "pioneers" - as the technological process for making EVs becomes more accessible, scaling will happen faster and companies like Nikola Corp. will need to have a truly unique product, specialization, offering - something that could qualitatively differentiate them from the others. I don't see any of that with NKLA.
What then does Nikola Corp. have?
Rising costs are an integral part of any fast-growing business. In well-built business models, revenues grow faster than operating costs, which allows one to eventually break even and thrive due to operating leverage. However, NKLA's situation looks absolutely scary, as revenue growth has recently slowed sharply on a quarterly basis [TTM-normalized] while operating costs continue to grow rapidly out of proportion:
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How can a company survive in such an environment while fulfilling the kind of commitment NKLA recently made to BayoTech? Only by attracting third-party financing - be it debt (bonds of bank loans)or equity (issuing new shares and diluting the shares of existing shareholders). This is exactly what the company has done since its inception. Given that the volume of liquid assets on the company's balance sheet directly approximates quarterly operating expenses - the burn rate looks insane - Nikola has no choice but to once again turn to additional financing in the near future.
Data by YCharts
Here I would like to make a point right away. There is nothing wrong with raising additional capital in the long run (why else would capital markets exist in the first place?). However, this is only true if the new capital raised significantly changes the business story. Considering how much competition NKLA will face in the next-generation truck market, the company's growth rate is unlikely to change much even if it raises new capital every week, in my view.
But as is often the case, the consensus disagrees with me - Wall Street is painting a successful future for the company in terms of year-over-year revenue growth:
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But even against the backdrop of such strong revenue projections, NKLA's EPS will still be negative for at least another 4 years.
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I think there are a lot of downside risks here if sales do not grow as forecast.
Nikola has yet to raise new capital through another share issue - earlier this month, the company did not receive enough votes to do so, according to SA News. But apparently, this limitation will not last long:
SA News, author's notes
In my opinion, the urgent need to issue more shares and the lifting of restrictions in this regard will be very convenient for NKLA in the near future. But oddly enough, what is good for business in this particular case will be detrimental to its shareholders - the stock will most likely cool down sharply as the new supply rushes into the market, and at prices that have already managed to rise strongly.
The Bottom Line
The main risk to my thesis is primarily the excess of FOMO in the market and even more inexplicable growth in NKLA stock in the short term. Because of this upside risk, I would not recommend shorting the stock at these price levels.
Moreover, I could be wrong in my assessment of the company's growth prospects. Perhaps Nikola has a hidden competitive advantage that will allow it to go from pioneer to the ultimate industry leader in the EV trucks niche.
But so far, I do not see anything positive. The vast majority of analysts on Seeking Alpha agree with me - I urge you to familiarize yourself with their analysis so you can get a more complete picture of Nikola Corp.
I am not even trying to value NKLA stock as its forwarding P/S values seem unrealistic to me based on the overly optimistic Wall Street estimates mentioned above. Because of the company's constant attempts to survive by issuing new share capital - which is likely to repeat again and again - investors need to look primarily at qualitative rather than quantitative characteristics. For example, the presence of a moat, comparative advantage, the level of competition, and the existing position of the company in the market, etc. By these criteria, NKLA does not seem to be investable at this stage, in my opinion.
That is why I urge investors and speculators to think about closing their long positions while the market still gives them the opportunity to do so at the current unrealistic prices. There may not be a second chance when dilution resumes.
Thank you for reading!
Source: Seeking Alpha
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