Is Nikola Stock Overvalued?

Nikola Corporation (NASDAQ:NKLA) is everything you wanted from Tesla Inc (NASDAQ:TSLA) at a fraction the cost and with a much less stigmatizing CEO.

The company offers electric vehicles with a focus on commercial vehicles (specifically semitrucks, which are widely depended on for transport). It hopes its alternatives to fossil fuel powered vehicles will help to clean up the environment, while generating profits for investors. But is Nikola stock overvalued?

The company’s market cap is already nearing $10 billion, with NKLA shares trading in above $20. That’s over twice the value at the start of the year, but far short of its peak of nearly $100.

The market it’s attacking is a big one, but it’s not alone. Tesla is hot on its tail, and both GM and Toyota have tricks left up their sleeves. How does this buzzy startup can compete against the big boys of the American automotive industry.

Why Nikola Stock Went Up

Nikola Corporation was founded By Trevor Milton in Salt Lake City, Utah in 2014, before moving its headquarters to Phoenix, Arizona. The company created engines using hydrogen fuel cell technology and built a nearly 400-acre production facility in nearby Coolidge.

By 2020, it was expected the factory would be up and running, with up to 50,000 trucks being built per year by 2023.

On September 8, 2020, the company announced a partnership with GM worth approximately $2 billion that pushed Nikola’s stock up 50 percent.

Two weeks later, Milton resigned as Executive Chairman amid fraud allegations that dropped the stock’s price by 20 percent.

Videos soon appeared online purporting to show how the company allegedly faked video footage of its Nikola One trucks.

Instead of working, they were allegedly idled and drifted downhill at enough speed to trick investors. Soon, Mark Russell was appointed CEO and the company started issuing takedown notices to critics.

Both the U.S. Justice Department (DoJ) and Securities and Exchanges Commission (SEC) announced in September 2020 that they’re investigating the company for intricate fraud.

It’s based on the claims of a short-selling researcher called Hindenburg Research, which stands to profit if Nikola fails. The company admits that the trucks were not rolling under their own propulsion although they were designed to do so.

What Lurks Inside Nikola Financials?

Nikola has been posting losses every quarter and received a $4 million Paycheck Protection Program loan from the Small Business Administration in April.

Still, the company launched its initial public offering in June 2020, which made Milton a billionaire and valued the company at $12 billion.

Its August 4, 2020 financial report ended with $0.29 losses per share, and the consensus is the company will continue losing more and more money over the next year.

It’s not set to begin shipping vehicles until late 2021, and there’s no guarantee there won’t be problems upon the launch (assuming nothing is delayed).

The Coolidge production factory will cost the company around $600 million, and reports as of mid-September say the ground has barely been broken and construction looks stalled.

It did still land a deal for 2,500 garbage trucks from Republic Services in August that gave some comfort to weary investors.

Meanwhile, many of the parts used in production have been outsourced, leading to fearful murmurs of Theranos, the failed health technology company that promised breakthroughs and delivered nothing but delays and promises.

That company reached a $9 billion valuation before going defunct as founder Elizabeth Holmes was charged with criminal fraud. Will Nikola suffer a similar fate?

Is Nikola Valuation Too High?

Shares traded in the $35 to $40 range initially during the summer 2020 IPO, reaching a high of $93.99 before plummeting to $20 to $25 on news of the fraud investigation.

This gives it a market cap in the range of $10 billion, which could be a great deal, if you believe they’ll deliver on the promise of a more sustainable semitruck.

It also removed the Badger electric pickup truck from its product lineup, showing a lack of confidence in its own products.

It’s also trading at almost half the $42.93 the stock was worth when GM made its initial deal, so it’s likely the company will look to make up this value by possibly demanding more stock.

Meanwhile, GM is rolling out its own electric truck in the GMC Hummer EV for the 2021 season. If the company can follow through with its promises, investors may even seek an exit strategy through a full GM buyout.

But that may not be at the price early investors hoped.

Will Nikola Stock Drop?

The company still has to deal with the allegations that it doesn’t really have a product in the aftermath of Milton’s departure.

Although he’s a scapegoat, it doesn’t change the fact that everyone betting on the company is doing so on the promise that it can deliver commercial trucks using hydrogen cell technology, which isn’t even the initial promise of the company.

It was initially an EV company meant to take advantage of the buzz surrounding Tesla, but GM made it clear they’re dealing with their own EV technology.

Short sellers may have a point that Nikola is biting off more than it can chew. It offers more products than Tesla while having multitudes less to show for it.

While it does have a deal with GM, it’s a precarious one that’s likely to be renegotiated before year end and could be a drag on the storied American automaker. Meanwhile, Toyota and Hino have a partnership attempting to beat Nikola to the finish line of its most promising product.

Is Nikola Stock Overvalued? The Bottom Line

Nikola’s 2020 IPO was buzzworthy, but the noise quickly soured as news from a short selling activist showed the company may not be all it appears.

Its partnership with GM is shaky, and the consumer EV pickup it wanted to create before Tesla’s Cybertruck looks defunct. Even its massive Arizona manufacturing plant looks quiet heading toward year end. These are all red flags that the company isn’t in a good place.

Still, it does have a partnership with GM to rely on, and it can still crank out something sellable over the next two years.

It’s just going to spend a lot of money getting there, and you may want to consider whether you want the company gambling with your future.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.