As a technology integrator, Nikola Corporation (NKLA) is engaged in developing energy and transportation solutions. The company offers integrated truck technology, hydrogen fueling and charging infrastructure, and related maintenance through two business units: Truck and Energy. I will discuss why it may not be worth buying the stock now in this piece.
During its earnings release, NKLA disclosed that it produced 133 battery-electric trucks in the fourth quarter, of which it could deliver only 20 to dealers due to the changes it made to its battery-electric truck during the quarter in response to feedback from early customers. As a result, the company’s total quarterly revenue of $6.56 million fell short of Street expectations.
However, the company’s prospects seem to be on an upward trajectory. With 258 trucks built in 2022, NKLA has said that it expects to deliver between 250 and 350 battery-electric trucks in 2023. The company also expects to reduce costs on its battery-electric trucks by about $105,000 per truck by year-end as it realizes savings from its acquisition of battery-pack maker Romeo Power.
NKLA is also on track to begin production on the hydrogen fuel-cell version of its truck in the second half of 2023 and deliver 125 to 150 of those during the year. To that end, the company entered into strategic partnerships with various hydrogen suppliers to construct a fuel network to power as many as 7,500 heavy-duty, zero-emission vehicles by 2026.
Moreover, plans are afoot to brand its hydrogen filling stations under the name “Hyla,” combining “hydrogen” and “Nikola.”
However, despite the optimistic management guidance, NKLA’s stock has lost 32.6% over the past month and 60.3% over the past six months to close the last trading session at $1.19.
Let’s take a closer look at the factors that could influence NKLA’s performance in the months ahead.
Weak Financials
For the fourth quarter of the fiscal year that ended December 31, 2022, NKLA’s loss from operations widened by 20.1% year-over-year to $195.42 million, while its adjusted EBITDA loss widened 83.5% year-over-year to $166.79 million.
As a result, the company’s non-GAAP net loss for the quarter widened by 93.3% and 60.9% year-over-year to $180.61 million or $0.37 per share, respectively.
For the fiscal year that ended December 31, 2022, NKLA’s loss from operations widened by 7.9% year-over-year to $748.68 million, while its adjusted EBITDA loss widened 47% year-over-year to $450.20 million.
As a result, the company’s non-GAAP net loss for the fiscal year widened by 55.9% and 40.5% year-over-year to $491.25 million or $1.11 per share, respectively.
Given that NKLA ended the quarter and the fiscal year with 19.7% and 10.8% more shares outstanding, the bottom lines paint a more dismal picture.
NKLA’s total liabilities came in at $710.18 million as of December 31, 2022, compared to $296.25 million as of December 31, 2021.
Poor Profitability
NKLA’s trailing-12-month gross profit margin of negative 206.11% stands out in stark contrast to the industry average of 29.70%.
Moreover, the company’s negative ROCE, ROTC, and ROTA also compare unfavorably with the respective industry averages of 13.83%, 7.02%, and 5.20%.
Bleak Bottom-Line Outlook
Although NKLA’s revenue for the quarter ended March 31, 2023, is expected to come in at $12.35 million, compared to $1.89 million in the prior-year quarter, it is still expected to report a loss of $0.30 per share. Moreover, the company has missed its consensus EPS estimates in three of the trailing four quarters.
Similarly, although NKLA’s revenue is expected to increase by 198.5% year-over-year to $151.70 million for the entire fiscal year, the company is expected to register a loss of $1.10 per share. Although losses are expected to keep narrowing, NKLA is unlikely to turn a profit during the next two fiscal years.
Stretched Valuation
Due to NKLA’s improving top-line and increasing expectations of its shareholders, the stock’s valuations increased to levels this fledgling company could find challenging to justify and sustain.
NKLA’s forward EV/Sales multiple of 5.97 is a whopping 284.7% higher than the industry average of 1.55. Similarly, its forward Price/Sales multiple of 5.01 is exorbitant compared to the industry average of 1.23.
POWR Ratings Reflect Weakness
NKLA has an overall F rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. NKLA also has an F grade for Stability, justified by its 5-year beta of 1.51 and the spread between its 52-week high and 52-week low prices of $8.97 and $1.15, respectively.
Moreover, NKLA has an F grade for Value and Quality, in sync with its stretched valuation and unimpressive profitability. Analysts’ estimates that betray significant room for improvement have been reflected in its D rating for Sentiment.
Unsurprisingly, NKLA is ranked #53 of 57 stocks in the Auto & Vehicle Manufacturers industry.
Beyond what has been discussed above, additional ratings for the Growth and Momentum of NKLA can be found here.
A Troubled Past and a Present Catch-22
Over the past year, NKLA has had to pick up the pieces after founder and former chief executive Trevor Milton was found guilty of securities fraud after repeatedly misleading investors and the general public about the company’s progress with its hydrogen fuel-cell trucks. The company had to settle a Securities and Exchange Commission (SEC) probe for $125 million.
However, there is still a long way to go before NKLA can get out of the woods with respect to its uncomfortable relationship with its finances. The company has said that the company is selling its trucks for less than what it costs to produce them.
This situation can be remedied by scaling up production volume. However, with a cash burn that saw NKLA end the fourth quarter of the previous fiscal year with a cash balance of $323 million, down from $403.8 million at the end of the prior quarter and $522.2 million at the end of 2021, that’s easier said than done.
With debt financing almost, if not wholly, inconceivable in an environment of increasing interest rates, on March 30, NKLA announced a $100 million secondary offering of its common stocks at a steep discount for working capital and other general purposes.
While significantly diluting the intrinsic value of the holdings of existing shareholders, this also signaled the company’s dire need for cash.
This depreciation in the value of its shares would compromise NKLA’s ability to finance its operations by issuing further equity without risking further devaluation of its outstanding shares.
Bottom Line
In view of its weak fundamentals and a long and uncertain path to profitability, it would be wise to avoid buying into NKLA’s sustainable mobility promise, at least until it can consistently deliver on them.
Stocks to Consider Instead of Nikola Corporation (NKLA)
Beyond potential short squeezes, unfortunately, the odds of Nikola Corporation delivering sustained risk-adjusted returns seem greatly compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Auto & Vehicle Manufacturers industry instead:
Mercedes-Benz Group AG (MBGAF)
Stellantis N.V. (STLA)
Honda Motor Co., Ltd. (HMC)
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NKLA shares were trading at $1.14 per share on Tuesday afternoon, down $0.06 (-4.62%). Year-to-date, NKLA has declined -47.22%, versus a 7.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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