Shares of electric heavy truck start-up Nikola (NKLA 7.23%) rocketed more than 110% higher in the first three weeks of June. But that came after the stock had plummeted as investors fretted about the future of the company.
Nikola has reacted to the situation by making a strategic adjustment, raising fresh capital, and streamlining its workforce. Those are some of the catalysts that caused or aided the stock's recent surge higher. The question for investors is whether the stock has bottomed and if the business moves now make Nikola stock a buy.
More than it could chew
Nikola's plan was to become the leader in converting the class 8 heavy truck segment to electric. The company initially took a two-pronged approach. It was first going to build and begin delivering battery-electric semitrucks. As that business grew, Nikola would be working to finalize its hydrogen fuel cell-powered versions and ultimately could offer whichever model better suited customer needs. But that strategy turned out much more complicated than the company planned.
It needed to perfect the technologies, of course. But it also needed a constant flow of capital, qualification of the vehicles to capture government incentives, and the buildout of hydrogen production and fueling infrastructure. Nikola also was simultaneously working to create a market in the U.S. as well as in Europe with a joint venture (JV) partner. There was good reason to have the European market in its sights. The potential on that continent is enormous.
Nikola initially wanted to expand its electric heavy truck sales in Europe along with the U.S.
Nikola did implement the first step of its business plan. It began delivering its battery electric trucks last year, generating more than $50 million in revenue. But it seems the company bit off more than it could chew as its need for capital and competition from both the Tesla Semi entering the market and legacy truck makers pushed Nikola to pivot its plans.
Shifting gears
In May Nikola announced it was "reprioritizing and refocusing the company." It sold its share of the European JV to its partner and will instead focus its efforts on its hydrogen trucks and related fueling infrastructure in North America. That includes mobile hydrogen fuelers in addition to fueling stations.
At the time of that announcement, Nikola didn't reiterate its delivery estimates for 2023. The company did say that it was still on track to start hydrogen fuel cell serial production in July as it expects to begin hydrogen truck deliveries by the fourth quarter. Nikola also says it has orders for 178 Nikola hydrogen fuel cell electric trucks from 14 different customers as of mid-June. It will also be able to continue to offer battery-electric trucks from the same production line at its Arizona facility.
A narrower focus on the North American market shouldn't prevent the company from potentially being successful. There is plenty of optimism for the heavy truck market to transition to electric.
Estimates show the market for electric heavy trucks could grow quickly in the U.S.
But it's still a very speculative investment and there are many hurdles for the business to succeed. In mid-June Nikola said it was trimming its workforce including at its U.S. facilities. The elimination of 270 jobs will save the company about $50 million annually. Other spending cuts will help it lower annual spending needs to under $400 million per year.
Nikola reported having about $130 million in cash and equivalents as of March 31. It has since announced additional funding through the sale of the European business and is working to get shareholders to pass a proposal allowing it to potentially offer new shares of stock to raise future capital.
The need for additional funding isn't the only risk with an investment in Nikola. A transition to hydrogen-fueled trucks has to take place. The only way an investor should justify investing in the stock now is to speculate on a growing hydrogen fuel economy. The sharp increase in the share price in June isn't a sign of an inflection in the business. But there is a basis to speculate on the stock if one is a believer in the future of hydrogen.
