What happened
Shares of clean-energy vehicle maker Nikola Corporation (NKLA 7.23%) surged over 120% in June, according to data provided by S&P Global Market Intelligence. The heavily shorted stock announced it had a plan to reduce its cash burn and is trying to secure authorization from shareholders in order to increase its total number of shares outstanding. As of this writing, shares of Nikola are still down 35% year to date (YTD) and 85% since going public in 2020.
So what
Nikola was a popular special purpose acquisition company (SPAC) merger started by Trevor Milton, who turned out to be a fraudulent promoter. Milton was caught red-handed pretending to drive a hydrogen-powered Nikola vehicle, but in reality, he was sitting in a vehicle rolling down a hill. Nikola has since struggled to bring real products to market.
After Milton was exposed as a fraud, he left Nikola and was replaced by automotive veteran Michael Lohscheller. Since then, Lohscheller and the new team have tried their best to keep Nikola alive and bring some products to market. But electric and hydrogen-fuel vehicles are incredibly difficult to manufacture. Last quarter, Nikola had total revenue of just $11 million and burned over $200 million in free cash flow.
So why is Nikola's stock up? First, Nikola announced a cost-reduction plan to get its cash burn down to less than $400 million a year by 2024. While good progress, Nikola only had $121 million in cash at the end of last quarter, meaning it is not far from running out of funds. To raise money, management has a shareholder proposal to increase the amount of shares outstanding for the stock. However, Nikola has failed to get the majority vote needed to allow management to issue more shares, with the deadline for approving the increased authorization set for July 5.
The likely reason Nikola's stock is up is just a simple short squeeze. Nikola has an estimated 22% of its shares outstanding loaned to short sellers. When these short sellers buy back shares, it can rapidly increase the share price -- especially for a small company like Nikola -- in what is known as a short squeeze. That is all that truly happened last month; the rest is just noise.
Now what
Nikola's business is still in dire straits. The company is going to continue burning cash, and even if it is able to issue more shares outstanding, that is not a good thing, as it will dilute existing shareholders of their ownership in the company.
Stay far away from Nikola stock. This isn't a business long for this world.