Nikola (Ticker: NKLA) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
Company Description
Nikola Corporation (NASDAQ Ticker: NKLA) is an American company, specializing in zero-emission electric vehicles, hydrogen-electric vehicles, electric vehicle drivetrains, vehicle components, energy storage systems, and hydrogen station infrastructure. In March of 2020, Nikola merged with VectoIQ Acquisition Corporation (Ticker: VTIQ), which is a publicly traded special purpose acquisition company run by former General Motors Co. (GM) executive Steve Girsky. This move proved to be valuable for several reasons, many of which are discussed below.
Quantitative Analysis
At the time of this writing (5/1/2021), Nikola is trading at $11.57 with a 52-week range of 9.37 – 93.99 and a market cap of 4.535B. There is currently no P/E ratio due to a lack of earnings, as Nikola is still in the developmental stages of operations. According to their 2020 Q4 earnings report, Nikola plans to begin trial production in Q3 of 2021. Nikola reported a loss of $382,735 last year which is about 4.3 times more money lost in production compared to 2019. Although NKLA posted losses in 2020, it could point to their investment into R&D, which will hopefully lead to trial production in Germany in June of this year and in Q3 in the USA. You can view a breakdown of NKLA’s earnings from 2020 here and view their 2020 annual 10K here.
Qualitative Analysis
Nikola is at the forefront of hydrogen-electric and zero-emission electric commercial vehicles (e.g., cab and sleeper semi trucks). Although Nikola specializes specifically in commercial vehicles, the electric vehicle (EV) sector in general is gaining tremendous momentum in the automotive industry. According to IHS Markit, global sales of battery electric vehicles and other EVs reached nearly 2.5 million in 2020 and some estimate that will rise by 70% in 2021. Hydrogen fuel cells (HFCs) represent a growing portion of the no-emission vehicle market, in large part because HFCs eliminate the handling/storing of toxic materials such as battery acid. Nikola is on the fore-front of developing HFCs and EV commercial vehicles in a rapidly changing, growing, and competitive industry. Because brand name plays an important role in vehicle sales, Nikola - at least for the time being - benefits from its name’s recognition and close proximity to the world giant in EVs, Tesla. As with any new and developing automotive company, Nikola faces several challenges, including lack of vehicle production. Although other commercial vehicle companies such as PACCAR and Daimler Trucks have proven track records of producing, selling, and maintaining commercial vehicles, the GM memorandum of understanding (MOU) and the progress of Nikola’s manufacturing facilities in Germany and Arizona give hope that Nikola can match or exceed the production capabilities of these established companies.
Bullish Thesis
Here are three points to support the bullish thesis:
Innovation of Hydrogen-electric vehicles: Although there are a few companies that have begun producing commercial electric vehicles, Nikola is at the forefront of producing Hydrogen fuel cells. Nikola is placing a large bet on hydrogen powered vehicles and hopes to act as a catalyst in building the infrastructure required to service such vehicles. Specifically, they plan to develop coast-to-coast hydrogen fueling stations where car makers like Toyota, GM, Honda, Hyundai, and Daimler can use to charge their hydrogen powered vehicles. This bet does not come without a large cost. Nikola is seeking to raise $1.55 billion in order to fund the production of hydrogen fuel stations. If this bet pays off, this would be huge for NKLA as they would be at the forefront of a new product of the vehicle industry.
Investment from GM: On November 29, 2020, Nikola and GM entered into a non-binding memorandum of understanding (MOU) on a global supply agreement related to the integration of GM’s Hydrotec fuel-cell system into NKLA commercial semi-trucks. The hiring of former General Motors Co. (GM) executive Steve Girsky seemed to have assisted with this MOU and gave Nikola more access to capital and a working agreement with a major player in the vehicle industry. Girsky’s experience with GM will also help with the development of Nikola’s manufacturing facilities currently under construction in Arizona and Germany as well as using the GM connection to get Nikola large clients who transport goods across the country.
Focused Development of Commercial Vehicles: With all the vehicle companies currently partnering and producing EVs and BEVs, it is beneficial for NKLA that they have decided to focus on the production of large commercial vehicles. The focus on a subset of the vehicle industry allows NKLA to master that industry as well as focus on large clients. This focus has seemed to pay off early as Anheuser-Busch Co. has placed orders from Nikola for 800 trucks. By not using heavy lithium batteries, such as the one being used in the development of Tesla’s Semi, it makes Nikola’s semis about 5,000 pounds lighter which in turn requires less energy for the Nikola semi to drive. This focus on commercial vehicles will allow NKLA to master the production and development of this niche within the industry.
Bearish Thesis
Here are three points to support the bearish thesis:
Lack of Production: Nikola is a young company with an unproven track record in vehicle production, maintenance, and sales, which should give pause to investors. Even relatively well-funded and popular EV companies such as Tesla have had difficulty meeting the rapidly rising demand of EVs. While steady progress on production plants and recent investments from GM help squelch these worries, Nikola’s ability to successfully leverage these developments remains to be seen. Getting production started in Q3/Q4 of this year should be a good initial stress test for the company. However, getting their production and sales pipelines up and running is only half the battle - tremendous growth in the EV industry also necessitates scalability. Time will tell whether Nikola will be able to successfully scale vehicle production to meet market demands.
Lawsuit: Nikola currently faces several legal battles, including one major class action lawsuit claiming that the company misled investors about their technological accomplishments and production capabilities. Much of this trouble stems from an investigative report published by Hindenburg Research in September of 2020, alleging that founder and executive chairman Trevor Milton had made numerous false statements to investors. Following the report, NKLA stock price dropped significantly and Milton resigned from the company. In its 2020 annual filing, Nikola conceded that some of Milton’s statements were “inaccurate in whole or part.” Win or lose, the ongoing legal battles will, at least in the short- to mid-term, be the source of some uncertainty amongst investors.
Lack of Recognition: As noted above, brand name recognition and so-called network effects are important components of the automotive industry. Although Nikola initially benefited from being a popular EV company specifically dedicated to commercial vehicles, competitors in this space may ultimately crowd them out. For example, Tesla plans to deliver it’s first Semi - an electric motor semi truck - in Q4 of 2021 (two years behind their original schedule). At the time of this writing, Nikola had ~85k Twitter followers compared to Tesla’s 9.2M. Like it or not, we live in 2021 where the ability to establish a large online following can have massive implications for a company, especially in this particular industry (for example, the ability to raise capital and maintain strong customer loyalty and trust in the face of legal issues involving serious vehicle collisions).
Learn more about Nikola Corporation here and be sure to keep an eye out for NKLA’s Q1 earnings report on May 7th.
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.