When Nikola Motor Corp. (NKLA +0.00%) went public earlier this month, it announced plans to begin producing its first battery-electric vehicles (BEV) in 2021, with production of hydrogen fuel cell electric vehicles (FCEV) set to begin in 2023. It's impossible to use traditional valuation metrics on a company that has yet to produce a product, but a comparison to electric vehicle rival Tesla's (TSLA +0.98%) path might be worthwhile.
Tesla's initial public offering (IPO) took place June 29, 2010. While Tesla was already manufacturing the Roadster sports car at the time, it was two years later that Tesla shipped its first Model S. In 2010, Tesla investors were betting on the potential for mass production of its BEVs when they valued the company at between $2 billion and $3 billion in the year leading up to initial production of the Model S. With Nikola approximately one year from its first planned product launch, the Nikola Tre BEV semi-truck, let's compare how investors are valuing Nikola's prospects from here.
Image source: Nikola Corp.
Valued based on prospects
With Nikola's initial BEV product launch not expected for at least another year, and its follow-up Nikola Two FCEV expected in 2023, investors are valuing Nikola significantly higher today than Tesla at a similar point in its development.
| Nikola | Tesla | |
|---|---|---|
| Market Cap 1 Year Prior to Initial Mass Vehicle Production* | $23 billion | $2.6 billion |
| Market Cap 3 Years Prior to Follow-up Vehicle Production* | $23 billion | $28 billion |
*Nikola estimated timetable. Table by author.
Tesla's first high volume production vehicle was the Model S, which debuted in 2012, although its first vehicle, the Tesla Roadster, had already been in production for four years by that point. Consumers could look to Tesla's existing technology and product reputation derived from the Roadster when they made deposits on the Model S. By 2014, the Model S was outselling all the other luxury cars that Tesla identified in its segment, production plans were in place for the new Model X SUV that same year, and mass production of the more affordable Model 3 was three years away.
Nikola, on the other hand, hasn't successfully produced a product yet. Nevertheless, the market is pricing Nikola at a similar level to where Tesla traded after having had experience producing its Roadster and with two years worth of product success with the Model S.
Investors are taking a leap of faith that Nikola's plans will proceed on schedule, that its first BEV will be a success, and that its second production vehicle, and first FCEV, will be available in 2023. But not all predictions come to fruition. Tesla said in 2016 that it planned to pull forward its 500,000 unit build plan by two years to 2018, but that didn't materialize. The company now hopes to get to that level in 2020. Despite failing to reach these goals, Tesla stock has continued to soar, up over 400% since the beginning of 2016.
Believing in leadership
Many Tesla investors invest based on their belief in the genius of its CEO Elon Musk. It seems early Nikola investors are feeling similarly about its CEO Trevor Milton. In its SEC Form S-1 filed prior to going public, the company identified its dependence on Milton as a risk factor, saying "Mr. Milton is the source of many, if not most, of the ideas and execution driving Nikola."
When it comes to the scope of their businesses, Nikola's ambitions are somewhat more conservative than Tesla's today. Tesla aims "to accelerate the world's transition to sustainable energy," and includes a home solar generation and energy storage business among its offerings. Milton has focused on vehicles, with plans to build out an affiliated hydrogen fueling station infrastructure necessary to operate the vehicle fleet (with plans to have the hydrogen produced via renewable energy).
Investors bet on the vision
Nikola says its total addressable market, including both vehicles and energy supply, is more than $600 billion. It also claims that it has more than two years worth of pre-orders for its FCEV, worth over $10 billion. This does compare favorably to the initial demand for Tesla's Model S. Prior to initial production, Tesla had 10,000 pre-ordered Model S sedans, representing less than one year of production volume.
If Nikola lives up to all of its predictions, its current $23 billion market capitalization isn't far out of line from how investors valued Tesla. However, as Tesla's history has shown, there are bound to be bumps along the road. Today's Nikola stock price reflects profound optimism with regard to Nikola's ability to execute on producing its vehicles, which may be overly discounting the difficulty of the challenge ahead of the company. Nevertheless, as Tesla has shown, the stock price could well remain elevated in the face of these challenges for a long time to come.
