Nikola (NKLA) stock hit record lows last week after the maker of hydrogen fuel cell trucks announced a 1-for-30 reverse stock split, which was the maximum ratio it could have gone for. The reverse stock split, which will go into effect after today's closing bell, will correct Nikola’s violation of Nasdaq listing rules, as its share price was consistently trading below the exchange's minimum threshold of $1.
To be sure, maintaining its Nasdaq listing is important for Nikola, as the company needs to raise cash frequently by selling its shares. However, the reverse stock split might not be the end of Nikola’s woes, as we’ll discuss in this article.
Nikola Went from Boom to Bust
As one of the first green energy companies to capitalize on the special purpose acquisition company (SPAC) boom of 2020, Nikola became a flag bearer of the renewable energy euphoria.
At its peak in 2020, Nikola’s market cap surpassed that of Ford Motor (F) – which was possibly the first warning about an impending bubble in the EV industry, as Nikola hadn’t even started delivering its vehicles by then.
The bubble eventually burst in late 2021, but not before Tesla’s (TSLA) market cap surpassed $1 trillion, while newly listed Rivian (RIVN) was valued at over $150 billion.
Since that peak, EV companies have been in the news primarily for reverse stock splits, guidance cuts, bankruptcies, and capital raises – with Nikola itself raising capital at regular intervals.
NKLA Has Restructured Its Business
Nikola has restructured its business, and is now a more focused company. Among others, it has sold the Badger pickup truck program, cashed out of its joint venture in Europe, and announced the liquidation of Romeo Power, which it acquired for $144 million in an all-stock deal in 2022.
Nikola Management is Working on Volume Growth
Nikola’s CFO Tom Okray who has worked with companies like Amazon (AMZN) and General Motors (GM) in the past, is spot-on about the way forward for the company. During the Q1 2024 earnings call, Okray said “profitability will not be where we want it to be until we can build scale. Simply put, it is not practical to optimize our cost structure without a meaningful level of volume.”
The same holds true for other startup companies in the green energy space, as not running plants to capacity leads to negative operating leverage and takes a toll on profits.
Okray, who joined Nikola as recently as March, also talked about how the company plans to increase volumes. First, he said the company is targeting national carriers that have a fleet of over 1,000. Second, he said, Nikola would be “more forgiving on the economics of the initial deal to build confidence with our end fleet users.” That’s a way to sugarcoat the fact that Nikola will continue to sell trucks below its production costs to increase adoption.
Finally, according to Okray, the company will expand its geographical reach beyond its focus markets of California and Canada.
NKLA Stock Forecast
While Wall Street analysts have a consensus rating of “Hold” on Nikola, last month, Bryan, Garnier & Co. initiated coverage on the stock with a “buy” rating and a $1 target price. In January, Baird also initiated a coverage on NKLA with an “outperform” rating and a $2 target price.
Amid the continued fall in its share price, Nikola trades below even its Street-low target price of $0.50, while the mean target price of $1.12 implies the stock more than tripling from current levels.
Nikola is a Play on Hydrogen Technology
Nikola is a play on the expected increase in the hydrogen economy. Carriers have been looking to transition to green vehicles, and hydrogen fuel cell electric vehicle trucks stand out over battery electric vehicles due to their higher range and low refueling time - both of which are quite important for trucks.
There is also regulatory impetus towards the green energy transition, and Nikola cited the Inflation Reduction Act of 2022, supportive policies in states like California, and the EPA Clean Ports Program as enablers of its business.
The company is also building out hydrogen infrastructure in North America under the Hyla brand, which it can monetize later if the hydrogen industry gains traction. Sales of particulate matter (PM) credits would be another line of revenue for Nikola. Incidentally, in the current quarter, the company expects to recognize the revenue from its first sale agreement for credits generated from the model year 2022.
Nikola has been getting new customers on board, and expects its order book to increase significantly - which Okray believes should be used to measure the progress on its business plan.
NKLA Now Needs to Execute Well
However, after a dismal track record since it went public, Nikola now has to execute on that plan – which means growing deliveries meaningfully with a clear roadmap to profitability.
As Nikola’s CEO, Steve Girsky, said during the Q1 2024 earnings call, “We are in the execution phase, not the planning or concepting phase.” He also touted the viability of its trucks and said, “At Nikola, we emphasize that this is not a science project."
The road ahead is not easy, and Nikola might need to raise more cash by selling shares, which would mean more dilution. The company’s outstanding share count has risen to over 1.3 billion, which is over 3.5x what it was at the time of its 2020 listing.
However, while Nikola stock has fallen to record lows and might appear attractive, I would still stay away from the company, as it looks like a risky proposition due to the weak balance sheet. With there being a widespread sell-off in the startup green energy space, there are a lot of other attractive stories with a much clearer roadmap to growth and profitability when compared with NKLA.
On the date of publication, Mohit Oberoi had a position in: F , GM , AMZN , TSLA , RIVN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
