Nikola Corporation (NKLA -2.71%) was perhaps the hottest stock in the summer of 2020. With the hype around its founder Trevor Milton and his vision for hydrogen fuel cells and battery-powered semi-trucks, investors bid up the stock to nosebleed heights. At one point, shares of Nikola stock were up 700% in just a few months.
But then, everything came crashing down when Hindenburg Research put out a scathing short report showing that Milton lied repeatedly about Nikola's progress and technological capabilities. Milton retired from the company, and the stock has been on a downward trend ever since. It is down 60% in the past 12 months.
However, with a new executive team on board, Nikola has made great progress on getting its semi-trucks out to customers. Does that make Nikola stock a buy right now? Let's take a look.
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Getting founder issues behind them
Milton retired from Nikola in September of 2020 after the Hindenburg report came out. Since then, Nikola has kept Mark Russell, who joined the company in June 2020, on as CEO of the business. Russell has many years of experience in the automotive parts and manufacturing industries, making him a great fit for the role.
The founder issues will always be an overhang, but it looks like Nikola has put most of the big issues in the rearview mirror. The company settled with the Securities and Exchange Commission (SEC) to pay $125 million in five installments for all of Milton's antics. While that is money Nikola would like to fund the business, it is a net positive that any investigation is now behind them.
Production ramping up
Moving to the actual business, it looks like Nikola made great progress with its battery electric vehicles (BEVs) in 2021. The first two BEV trucks were delivered to customers in late December, and the vehicles have already logged 4,500 miles with drivers. While it's still very early days, this is a great sign that electric semi-trucks will be commercially viable.
Nikola has multiple orders for more than 100 BEV semi-trucks per order with different companies. These are small deals that are likely just pilot orders. If successful, investors should expect Nikola to start signing much larger deals with trucking companies. With 3.5 million truck drivers just in the United States, there is a large market opportunity to go after.
Besides BEVs, Nikola is investing heavily in fuel cell electric vehicles (FCEVs), its other big product line. In January of this year, Anheuser-Busch started a pilot test with two of Nikola's fuel cell semi-trucks. Again, as with BEVs, it is still very early days, but if the beer company is happy with the FCEV test, it could develop into a long-term partnership where Nikola sells the company semi-trucks each year.
How big will Nikola be in five years?
Nikola is expecting to produce and deliver 300 to 500 semi-trucks to customers in 2022. In 2021, the company burned around $500 million as it builds out its production facilities, and investors should expect a similar or higher burn rate in 2022. This is fine as long as the company can keep growing its deliveries and show promising unit economics.
Each semi-truck sells for around $250,000, depending on size and specifications. That means if Nikola can eventually get to delivering 10,000 vehicles a year, that will equate to $2.5 billion in revenue. Of course, it will eventually have to turn a profit, but ramping up vehicle deliveries is the next step on the path to making this a properly functioning business.
With only $500 million in cash on the balance sheet at the end of 2021, Nikola will almost assuredly have to raise money from the capital markets in 2022 if it keeps up its current burn rate. This isn't necessarily a bad thing, but it will dilute existing shareholders, creating a headwind for future returns. Management is asking shareholders to allow it to dilute its stock to up to 800 million shares outstanding, which would be around double from where it is today.
Nikola's market cap is $2.9 billion as of this writing. If we assume the share count will double in the next few years, that market cap will grow to $5.8 billion assuming the stock price stays the same (it will likely be lower if that much dilution actually happens). Annual deliveries of 10,000 are multiple years out as well. To me, this makes Nikola stock much too risky to buy, even if you believe management is on the right track to grow this business over the next few years. Unless you are extremely confident about Nikola's technology and growth trajectory, now is not a great time to buy Nikola stock.
