As investors have pushed the pedal to the metal on Tesla's (NASDAQ:TSLA) stock in 2020, driving shares up more than 250%, plenty of others have watched from the sidelines, wondering where they could find the next electric vehicle (EV) stock. Many investors found that stock in Nikola (NASDAQ:NKLA) -- a company that claims it's sitting on $10 billion in potential revenue.
Days after it began trading under its own ticker in June (following its merger with VectoIQ), shares of Nikola soared more than 135%. However, the momentum has slowed recently. Shifting into low gear over the past month, the stock has slid 49%. Does that mean that Nikola has been forsaken? No way. With the company set to report second-quarter earnings on Aug. 4, it's possible that some encouraging news could rev the shares back up. Of course, before investors hop aboard with the EV newcomer, there are some important things they should know.
Patience is a virtue
For investors who are driven to move Nikola from their watchlists to their buy lists, it's critical that they realize the company has yet to generate any significant revenue. In fact, it is solar installations, not EVs, that management credits as the primary source of the company's recent revenue: $482,000 in 2019 and $173,000 in 2018.
Fully committed to the development of both its battery EVs and fuel cell EVs (FCEVs), the company doesn't plan to continue installing solar projects moving forward. Investors, however, shouldn't expect to see the company produce anything notable on the top line until 2021 -- at the earliest. In order to achieve this feat, Nikola will have to execute its plan to begin production of the Nikola Tre vehicles in Germany early next year and deliver them to customers later in the year. Should those plans go awry, however, revenue likely won't be seen until 2022. But the greater catalyst for the company is the completion of its manufacturing facility, which will produce the Nikola Tre and Nikola Two in Arizona. Estimating it won't commence operations until 2023, Nikola foresees the facility will have annual production capacity of 35,000 units.
Take a step back before believing the bounty of the backlog
Management has certainly stoked investors' enthusiasm for the company's potential, citing a backlog of $10 billion in potential revenue based on 14,000 reservations for its FCEVs. But investors should exercise some caution before believing the hype. For one, with construction of the Arizona manufacturing facility under way, it will be a couple of years -- if the company remains on schedule -- before the company begins to see its EVs roll off the assembly line.
Secondly, the FCEV reservations are non-binding and didn't require deposits, so the potential customers can walk away from them at any time. With competition increasing from other EV automakers like Hyliion, which will soon go public through its merger with Tortoise Acquisition (NYSE:SHLL), this seems like a real possibility. Hyliion has a hybrid electric solution currently on the market, so those looking to eschew conventional trucking options don't have to wait for Nikola -- or Tesla and its Semi for that matter. Moreover, the pressure that Hyliion represents will continue to increase as the company nears volume production of its Hypertruck ERX, of which volume shipments are expected in 2022.
Dealing with debt and dilution
Prospective investors must also be cognizant of the fact that Nikola, which isn't generating cash organically, will have to raise capital -- whether by issuing additional equity, or debt, or both. According to the company, the Arizona manufacturing facility requires a hefty capital investment of $600 million. In light of the fact that the company had $75.5 million in cash on hand at the end of Q1 2020, the need to secure additional cash is a certainty. While the company only has debt of about $4 million, it wouldn't be surprising if it decided to raise capital by tapping the debt market. But investors should be sensitive to the fact that the company may decide to forego the weighing down of its balance sheet and decide to raise equity instead -- in which case shareholders will suffer from dilution.
The prospect of dilution for current shareholders is especially relevant, considering the company recently announced it will begin redeeming 23 million publicly traded warrants. Since the exercise price of the warrants is $11.50 per share, and Nikola's stock is currently trading at about $30, it's probable that shareholders are facing significant dilution in the near term.
The final word for those charged up about this EV automaker
It's understandable why Nikola has electrified investors' excitement recently. As EVs become more widely accepted, gaining exposure to the nascent market seems like a smart long-term strategy. However, investors should be clear about the sizable risks that relate to an investment in the company. Thus, only those with a high tolerance for risk should consider going along for a ride.