Is Nikola Running Out Of Power?

Summary

• Nikola is the new high-flyer in EV and Tech; the hype may be the only thing in the driver's seat right now.
• Despite negative sentiment, there are prospects that could lead to success if Nikola can capitalize.
• The current state of the company doesn't necessarily suggest near-term revenue, while its Anheuser-Busch deal hype relies heavily on reservations that are open-ended.

The Epic Climb Of NKLA Stock Raises More Questions; Is It Just An Overpriced Penny Stock?

Penny stocks are typically considered equities trading below $5. When you first look at Nikola Corporation (NASDAQ:NKLA), you might be wondering how it would remotely be related. Let me be first to say that in no way am I saying NKLA is a penny stock.

Based on what's publicly available, specifically within the company's own financials, the statements used are akin to a start-up company; not one worth over $1 billion.

If you haven't heard about Nikola quite yet, let's go over some of the basics. The company went public after a combination with VectoIQ Acquisition Corp. (f/k/a VTIQ). The whole purpose behind Vecto, in its own words, was "for the purpose of effecting a merger, share exchange, asset acquisition, stock purchase, recapitalization or other similar business combination with one or more businesses."

Nikola Corp. Goes Public

Essentially, we're talking about a "blank check" company already. As I'm sure many of the experienced traders reading will agree, blank check companies are typically found on the OTC in many cases. Instead of doing a traditional public offering, Nikola agreed on March 3rd to merge with VTIQ. It also raised over $700 million from investors. On top of this, some of the details of a simple PIPE transaction or "private investment in public equity" show something else.

Buyers were able to get shares in the special purpose company (VTIQ) for $10. PIPE investors included BlackRock, Fidelity Investments, and ValueAct Capital who purchased 50 million shares of VectoIQ. Those shares converted to Nikola shares on June 4.

Given the fact that shares weren't much higher than $13 at the time, a 30% discount might have not seemed "that bad". But, again, it's something we see a lot of when it comes to penny stocks doing PIPE deals. Needless to say, VTIQ went on to trade as high as $38 before NKLA stock went online.

NKLA Stock Finds Early Success, But What About Future Prospects?

There's no doubt that NKLA stock was a big winner for many. In the stock market today, it seems traders are flipping shares on short-term speculation and not taking a more fundamental approach. No one can argue with the fact that the stock produced significant, short-term gains. But, is anyone looking into the specifics of the company? Even someone I would consider a bull's bull, Jim Cramer commented that VectoIQ (at the time) was "too hot".

There's also the fact that the company has said it has a deal in place with Anheuser-Busch LLC (BUD) to lease up to 800 of its "Nikola Two FCEV" trucks. You'll also hear things like "expecting $10 billion in sales". But the interesting part is that, in light of having 14,000 reservations for its Nikola Two FCEV trust, as of the end of last year, these reservations are concealable. Also, these are reservations and not actual cash orders.

Furthermore, that company's original S-4 filing from March 13th states that delivery of its trucks isn't expected to begin until "2021 for our Nikola Tre BEV and 2023 for our Nikola Two FCEV, and may occur later." Are we talking about the same Nikola Two FCEV trucks that Anheuser-Busch LLC agreed to lease? Will they really have to wait 3 years?

"Even if we are able to successfully develop and sell or lease our trucks, there can be no assurance that they will be commercially successful. Our potential profitability is dependent upon the successful development and successful commercial introduction and acceptance of our trucks and our hydrogen station platform, which may not occur."

Do Risks Weigh Heavily Against Rewards In The Long-Term For Nikola?

On top of this, there are concerns raised by the company that it might not even know how to fix a truck if there's a mechanical problem:

"We currently have no frame of reference by which to evaluate the performance of our trucks upon which our business prospects depend,"

and,

"Because we do not plan to begin production of our trucks until 2021 at the earliest, we have no experience servicing or repairing our vehicles."

Furthermore, other regulatory bodies could pose an issue. This goes for reaching the goal of 2021/2023 or not. In an article on Transport Topics (ttnews) "Suppliers' Input Helped Shape Nikola's Class 8 Vision," there's an interesting quote to take note of. Reporter, Roger Gilroy wrote,

"Nikola faces a couple of hurdles as it prepares for production, Wainscott said. The biggest one is getting the necessary U.S. Department of Transportation certifications."

In the same article, he cites experiences from Allan Wainscott, general manager of Thompson Truck Center, a unit of Thompson Machinery. He cited Wainscott remembering "receiving a mass e-mail from Milton saying Nikola was looking at building a gas turbine electric truck". No updates have come from the company regarding DOT processes, which is to be expected. Without an actual truck, what is the extent of any such process?

"The insurance industry is also going to want to have some information on crash tests and rollovers. So that takes some time and there may be some delays. [Milton] has to go through that first to understand what he has to correct, if he has to correct anything."

Allan Wainscott, General Manager of Thompson Truck Center

Is NKLA The Next Tesla Or Just A Wannabe?

This isn't all about doom and gloom but rather the facts. These include the fact that Nikola has no intention of bringing a product to market until 2021 at the earliest. Despite showing minimal debt, there are plenty of discounted shares floating around via the VTIQ transaction. Could they pose a risk for retail traders?

Data by YCharts

When it comes to trading penny stocks, this discount share price risk isn't uncommon. Most average traders will understand the mechanics and how to navigate those waters. But for those "playing" with volatile, $1 billion+ companies, it might come as a shock.

Volatility is, of course, expected in such a cutting edge stock. We'd simply like to point out some of the factors listed in the initial filing. NKLA stock may be one to watch for right now. But risks and potential rewards need to be weighed as well. Can the company actually come through with $10 billion in revenue while managing its balance sheet appropriately? If so, then that would obviously be a big deal. But if a company like Anheuser-Busch decides that waiting until 2023 isn't optimal, what would happen?

"At times we have indicated that if we are able to sell or lease every truck which has been reserved, we would have sales of $10 billion in projected revenues. Because all of our reservations are cancellable, it is possible that a significant number of customers who submitted reservations for our trucks may cancel those reservations."

March 13, 2020 S-4

How much faith will investors put in the idea that Nikola "would have sales" if it's able to run its business? Again, a going concern that start-up companies will have. But, is it something that a $1.6 billion NASDAQ stock should have at this stage?

Is There Light At The End of The Tunnel For Nikola?

It's obviously very early on for Nikola Corporation and a lot to digest. Considering Tesla (TSLA) went public and was 3-5 years out from production puts some things into context. Is Nikola an overpriced penny stock? At this point, the market doesn't think so, and the parabolic run may currently suggest investors are buying into the future of the company. Whether or not that future is truly bright depends on a lot of moving parts, many of which we discussed above.

But the company has made steps forward. Aside from the reservations, the company has the wheels in motion on growth. IVECO and FPT Industrial, the commercial vehicle and powertrain brands of CNH Industrial N.V. (CNHI), and Nikola Motor Company will manufacture the Nikola TRE in Ulm, Germany.

Will Europe Act As The Proving Ground?

Through their European Joint Venture, the trucks will be manufactured at the IVECO manufacturing facility. Is this how Nikola is working around certain department of transportation requirements? Also, will it take a similar approach in the U.S.? Its Nikola TRE, for instance, is based on the IVECO S-WAY and integrates Nikola's technology.

Needless to say, this venture also saw CNH Industrial taking a $250 million stake in Nikola. Again, the company said that fuel-cell electric versions, built on the same platform, will be tested under the EU-funded H2Haul project during 2021 for an expected market launch in 2023. Prior to this, the U.S. Department of Energy awarded the company a $1.7 million grant to advance its research into fuel cell membrane electrode assembly.

Given the market's momentum and corporate backdrop, what do you think? Is NKLA stock worth the market cap? With all of the innovation in the works from tech giants, companies like Nikola are sure to attract today's risk-averse investor. In light of this, is NKLA on your list of stocks to watch in 2020?

Originally published on June 9, 2020.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.