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Amazon Lifts Nasdaq 170+ Points on Earnings Hopes; Nikola Plunges as Warrants Bring Dilution

By Dan Caplinger – Jul 20, 2020 at 1:39PM

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The Nasdaq led the broader market on Monday.

The new week got off to a mixed start on Wall Street, but investors in the Nasdaq Composite (^IXIC) were celebrating. Both it and the Nasdaq-100 index benefited from a big bounce in technology stocks, rising between 1.5% and 2% as of 1 p.m. EDT.

Amazon (AMZN -0.07%) has been a market leader lately, and the e-commerce and cloud computing giant added to its supremacy by getting a big boost from Wall Street analysts. Meanwhile, the news for electric-truck maker Nikola (NKLA -0.76%) wasn't as good, as investors faced the sudden dilution resulting from some outstanding securities convertible into Nikola shares.

Amazon keeps on being amazing

Amazon stock was up 6% Monday afternoon on newfound optimism for the company, which reports its latest earnings results later this week. The one-time bookseller has seen its market capitalization soar past the $1.5 trillion mark, and at least one analyst sees room for further gains.

Amazon logo in black and orange-brown.

Image source: Amazon.com.

Analysts at Goldman Sachs joined the chorus of Amazon bulls, once again increasing their price target on the stock. Because of a big rise in e-commerce sales in the North American market, Goldman set a new target of $3,800 per share -- $800 higher than its most recent increase from just two months ago.

Higher revenue won't come without costs. Amazon has already said it would have to spend more money to keep workers safer from the coronavirus as well as to handle higher shipping volumes. Nevertheless, rising demand could well persist for years, and that will boost the company's top line.

Amazon has performed strongly in 2020, and analysts are only now realizing its full potential. Whether that means additional gains for the stock remains to be seen, but Amazon plays a vital role in the lives of millions of people in the U.S. and around the world.

Nikola gets sideswiped

Elsewhere, shares of Nikola plunged more than 20%. The electric-truck maker has seen its stock fall sharply after a huge parabolic move higher in early June, and investors in some other securities that track Nikola got a chance to cash in Monday for the first time.

Nikola came to the public markets by doing a merger with a special purpose acquisition company (SPAC), which had warrants that allowed investors to purchase additional stock for $11.50 per share if they so chose. When the merger occurred, those warrants carried over, but they weren't immediately exercisable.

That changed over the weekend, with Nikola filing disclosures with the U.S. Securities and Exchange Commission that indicated that shareholders would now be able to exercise their warrants. Specifically, if investors take advantage of this right -- which all should -- then the result will be a huge boost in the number of shares of Nikola stock outstanding. However, with the exercise price being much lower than the current stock price, existing Nikola shareholders will feel the pain from dilution.

Astute investors had already picked up on this issue, which was one reason why the warrants themselves are actually trading higher Monday. However, as Tesla (TSLA 1.05%) rocketed upward by 5% today, Nikola investors have to wonder whether the fledgling truck maker will ever catch up.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Tesla and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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