Nikola (NASDAQ: $NKLA) – A Boom or Bust?

Nikola

Shares of Nikola swelled by 22% last week trading at around $42 a share after the hydrogen-powered truck maker announced a deal to supply 2,500 zero-emission garbage trucks.

Manufacturing starts as early as 2022, with deliveries to follow in 2023.

The company recently made progress on its manufacturing facility in Arizona as well, with the site expecting to produce 35,000 vehicles a year once phase three is completed.

The announcement is one of three milestones Nikola (NASDAQ: $NKLA) promised its investors it would deliver on this year:

  1. Partnerships for manufacturing its all-electric Badger pickup
  2. Hydrogen fuelling stations for its semi-trucks, and
  3. Announcement of its first-ever order.

This climb in the stock comes after a sharp drop last week after Nikola released its first-ever earnings, which sent its stock plunging.

The earnings were worse than expected.

Nikola revealed it had incurred an $86.64 million loss through the second quarter of 2020, primarily because it has no revenues yet, partially because of the disruption in its supply chain caused by the pandemic.

According to a filing with the Securities and Exchange Commission, Nikola’s second-quarter revenue of $36,000 came entirely from solar installations for Chairman Trevor Milton.

Trevor Milton, founder and CEO of Nikola in the company’s headquarters in Phoenix

Nikola shares have been extremely volatile since it went public in early June 2020 following a reverse merger with a special purpose acquisitions company. At its high, market capitalization surged to almost $29 billion, surpassing Ford’s valuation, despite rapid burn rate and having zero revenue.

To any rational investor, this would seem crazy.

It doesn’t make any sense that a company that has zero revenue – has not sold a single car yet, and all it has published so far are plans of what they intend to do – should have a higher valuation than Fiat-Chrysler, which sold around 2.2Million vehicles in 2019 alone.

“How can a company with virtually zero revenue have a $29 billion valuation?

The answer to this question lies within investor psychology – and Silicon Valley hype.

The main reason for the colossal valuation is the hype around the company’s new technologies and its potential to compete effectively with Tesla.

People assume that Nikola stock will follow suit and generate enormous returns for investors just like Tesla stock has. Tesla is up 228.54% YTD and has been one of the best-returning stocks in the past decade.

Investor demand for clean transportation companies that do not still have one foot planted in the combustion-engine past is also increasing. Many people rightly believe that hydrogen is the future of the automobile industry.

But is this enough to justify its multi-billion-dollar valuation?

Many people in the late 90s rightly believed that tech stocks were the future; they rushed into internet stocks that had zero revenues and caused the internet bubble of the late 90s.

Is history repeating itself?

Just because an industry has a bright future does not mean that a company within the industry does. Only a handful of internet stocks survived the 2000 crash and are thriving today.

On the flipside, when Apple released the iPhone, many investors thought it was just another mobile phone, like Blackburry or Nokia. But it was so much more, a whole new category: The Smartphone.

What if EVs and Hydrogen powered vehicles are like the Iphone, and internal combustion engines are like their old competitors and will get wiped out soon?

What happens to traditional auto companies when faced with a huge phase shift like EVs? Can they make the leap? or will they be a thing of the past?

The first rule of investing is that you do your due diligence before you put your money to work. Second, is only to invest into a company that you fundamentally understand.

With Nikola, there simply is not enough information to be able to do either. The company might seem promising with a bright future; however, there isn’t much information so far to suggest that.

It is too early and too risky to invest in Nikola at the moment.

 

 

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Parsa Nikoy

Parsa is entering his third year at Henley Business School at the University of Reading, pursuing a bachelor's degree in Accounting and Finance. During his undergraduate studies, he has been an eager member of the finance society, participating in a day-long trading simulation where he attained first place as a market maker and sales trader. Parsa manages a personal portfolio of common stocks. With a long-term horizon, he looks for undervalued small-cap businesses that will yield considerable returns in 10 to 20 years. In his free time, Parsa enjoys reading, listening to podcasts, and continually expanding his knowledge of investing. He is also an avid boxer and trains frequently.

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