In Focus: Nikola Motors
Billions have been lost chasing the next great thing. In the world of investments billions have been lost chasing the next Amazon.The six words, "... could be the next Amazon" has given investors leeway to justify companies trading at high multiples, even though they've accomplished very little, and their futures look as bright as the horse and carriage did on the day the Model T was released. Despite the billions that have been lost, Wall Street and many retail investors are ready to do it again, this time with Nikola (NKLA).
Nikola is the most talked about player in the electric vehicle space as of late. The company plans to manufacture electric and hydrogen powered semi-trucks, light military vehicles, and off road vehicles. Investors quickly embraced Nikola as a publicly traded company and bid the stock up from $33 a share to upwards of $90 a share within a few days.
The company currently finds its market capitalization above $20 billion, something that took Tesla10 years of producing vehicles to accomplish according to EVANNEX. Currently Nikola's market cap sits slightly below Ford's market cap.
Nikola was able to get to the public markets by conducting a reverse merger. In this process Nikola merged with publicly traded company VectoIQ, once the merger was completed, VectoIQ began trading under the Nikola name. The reverser merger path to the markets has allowed Nikola to become a public company while escaping the public and regulatory scrutiny that precedes most other companies going public.
The company does enter the markets with potential and promise. It has over 14,000 orders for its semi-trucks, with Anheuser-Busch (BUD) placing an order for 800 trucks. However, it's doubtful that all of the pre-orders are binding and that deposits were required for the pre-orders. Still, the company's CEO is very optimistic about the future of the company.
"We will provide drivers with better trucks and better quality of life,” Trevor Milton explained to Barron's.
The company's SEC filing revealed it generated $38,000 in revenue and $33 million in losses for the quarter ending March 31, 2020. The company expects revenue to increase to $150 million in 2021 and then to $3.2 billion by 2024.
The company plans to begin taking pre-orders for its battery and fuel cell consumer truck the Badger this month, and will partner with an automaker to produce the Badger. Nikola has not announced its partner for the Badger yet, but expects to start production in 2022.
Because Nikola has decided to specialize in hydrogen fuel cell technology, it won't have the luxury of piggy-backing off the EV infrastructure that has already been established. According to greencarreport.com, only 39 hydrogen fueling stations exist in the U.S, which forces Nikola to build its own infrastructure to support its trucks. Nikola plans to have over 700 hydrogen stations in the U.S. and Canada by 2028. Anheuser-Busch is working with Nikola to develop the first 28 of those hydrogen fueling stations.
In addition to Anheuser-Busch, Nikola has been able to secure other investors to help with its plans. CNH Industrial (CNHI) has invested $250 million in the company as a Series D investor, and with it's companies IVECO and FPT Industrial have partnered with Nikola to start development of Nikola's Tre truck model.
Nikola and its CEO have grand plans for the future, but some have questioned whether hydrogen fuel cells are the way to go. For Nikola, its refueling stations will need to produce hydrogen by a process called electrolysis. Water electrolysis has been expensive in the past, and if Nikola can't find a way to lower the cost related to electrolysis, and make it cheaper than diesel, it will have a tough time persuading companies to switch from traditional diesel powered semi-trucks.
Finding a manufacturing partner, going public, and developing an infrastructure for it's trucks were already tall tasks before having to deal with the COVID-19 pandemic like every other company.
Nikola was able to secure a $4.1 million PPP loan, which the company stated would act as a cash bridge to retain its 300 employees while the VectoIQ deal closed.
The company addressed their need for the PPP loan by explaining to CNBC that Nikola is a pre-revenue company with a lot of expenses and a high burn rate. "There’s a difference between a high valuation and having cash,” the company said.
According to former Aegon Asset Management U.S. CEO Gary Black, Nikola's biggest issue is its lack of manufacturing capabilities, which puts it behind not only Tesla, but the other EV companies planning to introduce an EV product to market in 2021.
This puts added pressure on the company to choose the right partner for it's Badger truck if it wants to keep investors happy and its stock price high. Investors witnessed Elon Musk and Tesla struggle to hit production goals using their own facility to manufacture their own vehicles. Should Nikola run into those kinds of problems while dealing with a manufacturing partner, investors could flee the stock in droves, convinced that a working product and revenue are further down the line than initially expected.
If Nikola can get most of it right, the partnership, it's manufacturing facility in Arizona, and if its infrastructure it has an opportunity to be a rainmaker for shareholders. JB Hunt (JBH), a national trucking company reported net income of $516 million in 2019. Expenses related to fuel costs for the company were 5% of total revenue or $467 million. For ArcBest (ARCB) 11.9% of its revenue went to fuel and supplies expenses in 2019. The cost savings that Nikola expects to bring to the long-haul trucking industry represents tens of millions of dollars in savings to trucking companies.
Cowen analyst Jeffery Osborne described Nikola as an "intriguing investment opportunity" given its focus on powersports, pickups, and autonomous vehicles. Osborne also noted the option of a fuel-cell electric vehicle or a battery electric vehicle, along with the partnerships Nikola has forged, which all play a role in de-risking the company's 2021 production ramp.
With over $10 billion worth of pre-orders in hand for its semi-trucks, which the company believes will be its bread & butter, there could be an even more tangible windfall of cash flowing the company's way when reservations for the Badger open up on June 29. Unlike the semis, a Badger pre-order will require a $250 to $5,000 deposit according to Trevor Milton in a CNBC interview.
Should Tesla be worried? Elon Musk has made it clear in the past that he is not a fan of the hydrogen fuel cell approach, once referring to it as "fool cells." “It’s just very difficult to make hydrogen, store it, and use it in a car. Hydrogen is an energy storage mechanism. It’s not a source” Musk stated in an interview from 2015.
$NKLA is a bubble that will end badly for retail investors in it, tweeted Gary Black. Black still sees Nikola as pictures and promises, and does not feel it should be compared to Tesla. His argument, that at Nikola's current valuation Tesla was already manufacturing its Model S and Model X vehicles, and to date NKLA has yet to produce a truck or advise investors when a truck will be shipped to its purchaser. All valid points.
Investors considering Nikola shouldn't ask is Nikola the next Tesla, they should ask themselves is Trevor Milton the next Elon Musk or Jeff Bezos or Mark Zuckerberg? Ground breaking companies with revolutionary ideas don't succeed because of the idea, they succeed because of the CEO and management team.
But there isn't any rush, stocks never go straight up, and rarely if ever do plans go as we draw them up in our heads without any problems. Problems will arise for Nikola and investors will flee the stock due to the short-term thinking of the markets.
I've been very critical of Elon Musk in the past and have stayed away from investing in Tesla. But the pull back in the stock during the pandemic, coupled with the company's last three quarters provided an opportunity to invest. The stock market is notorious for giving investors looking for value two, three and sometimes four opportunities to invest at a reasonable risk-to-reward ratio, and it will more than likely do the same with Nikola.