The future of transportation is almost certain to rely far less on fossil fuels than it does today. That's particularly true in the trucking segment, where fuel is one of the biggest expenses for fleet operators, and their corporate customers are seeking ways to shrink their carbon footprints.
Nikola (NKLA -2.44%) is one of the companies expected to be a disruptive force in trucking. The company is developing heavy-duty vehicles that combine electric motors and hydrogen fuel cells, aiming squarely at competing with the diesel-powered machines that dominate the highways now. Since the company went public via a merger in June, early investors in the company have already nearly doubled their money.
But are there more share price gains to come? Investors are expecting big things, considering that Nikola hasn't even begun commercial manufacturing and could be another year away from mass-market production. Let's take a closer look at whether or not Nikola has millionaire-maker potential.
Image source: Getty Images.
A tough industry to disrupt
Diesel is the standard for medium- and heavy-duty transportation. Whether it's a class 8 tractor-trailer, dump truck, or other vehicle hauling heavy loads or traveling long distances, the diesel engine is still the preferred powertrain.
The primary reasons for that are access to fuel and range, but there are also operating benefits in terms of service and maintenance costs. If a fleet operator adds a different technology, it also has to add the capacity to service those vehicles. That means more parts in inventory, new training for maintenance employees, and changes to maintenance facilities.
Therefore, for a transportation fleet owner to make a change, there has historically needed to be a clear financial benefit. This is why, so far, no technology has displaced diesel in a meaningful way -- particularly in heavy trucking.
Image source: Getty Images.
The closest thing to a significant disruption so far has come from Clean Energy Fuels (CLNE -0.89%), which provides natural gas and renewable natural gas to transportation users. The company has steadily grown its fuel volumes at or near double-digit percentage rates for years, but is only just now approaching a level of 400 million gallons per year. For context, heavy-duty trucks consume more than 40 billion gallons of diesel annually in North America.
What does Nikola bring to the table? The potential to disrupt diesel in a way that other technologies have not been able to, because it can compete on fuel weight and range, and offers a drivetrain system that requires far less regular maintenance than combustion engines.
The company also says it can provide all that with a total cost profile that's less than operators pay today for diesel trucks. If Nikola can, indeed, break down those barriers to entry for a new technology, it could be enormously successful.
Why the risks are high
Over the past decade, there have been major advances in all of the technologies that Nikola is counting on to deliver on its promise, but nobody has packaged them together in a heavy-duty vehicle and shown that it can actually deliver.
Nikola aims to change that. The company says it has orders for almost 15,000 fuel cell electric trucks worth $10.2 billion in revenue, with the majority of those orders from large fleet operators. Potentially its most important order is AB InBev (BUD 1.43%), which has a binding order for 800 trucks; 65% of the orders are from corporate customers with investment-grade credit ratings.
One key thing that underpins a large portion of these orders is that many are not from trucking companies, but large corporations that are factoring the reduced greenhouse gas emissions of a switch away from diesel in their decision. Carbon footprints have become bigger factors in many corporate investment decisions over the past several years, and they are likely to become increasingly important because shareholders are saying that how companies address climate change is more important to them.
Image source: Getty Images.
That's great for Nikola, Tesla (TSLA -1.92%), and other companies developing commercial transportation powered by lower-emission energy sources (including Clean Energy's Redeem biomethane).
Nonetheless, the risks are still enormous simply because nobody -- not Nikola, not Tesla, not any of the big truckmakers -- has proven that these technologies can reliably meet the demands of operating 100,000 miles per year across various environments and hauling applications.
And therein lies the biggest risk for Nikola. Despite having over $10 billion in orders in hand, the company has yet to demonstrate it can deliver on what it is promising, and it will likely be a year or longer before potential buyers can find out if Nikola's trucks meet their expectations.
That's a massive "if," and a long wait before we get an answer. And Nikola won't sell a single product over that period.
I also expect it will neither be the first nor the only company to bring a zero-emissions truck to the mass market. Competition will be fierce. The incumbent truck and powertrain makers aren't just going to roll over and cede the market to an upstart that's never sold a single truck before.
NKLA Revenue (TTM) data by YCharts
A compelling story, but a massively risky investment
Look, anyone who really thinks Nikola has justified a market cap that's already higher than Ford's is wrong. Nikola at this point is a great story stock. The idea of a zero-emissions heavy truck is compelling, exciting, and would be amazing for humanity and the planet.
I also think the odds are pretty good that Nikola will develop and sell battery-electric and hydrogen-electric trucks. The technical barriers are getting lower, and a growing desire to reduce emissions is shifting the narrative in boardrooms and fleet managers' offices.
But based on its current valuation, I think it's probably more likely that Nikola investors will lose money over the next three years than that the stock will ever prove a millionaire-maker investment.
At this point, we don't even know if Nikola can become a viable going concern. It has no manufacturing, servicing, or refueling footprint. It's just a great idea with potentially a compelling technology.
NKLA Market Cap data by YCharts
The market already values the company in the same range as some of the world's biggest truck and engine makers. That prices in some incredibly high expectations for a company that is still a year or more away from commercial production. The stakes are incredibly high, and at its current valuation, even if Nikola executes perfectly, that wouldn't guarantee good returns for investors opening positions today.
