Nikola (NKLA 1.95%) has burned a lot of investors since its public debut. The electric semitruck maker went public by merging with a special purpose acquisition company (SPAC) headed by former General Motors vice-chairman Steve Girsky on June 3, 2020, and its stock opened at $37.55 on its first day as a combined company. That share price more than doubled to its all-time high of $79.73 just six days later.

But today, Nikola trades at about $2 a share. Its stock collapsed as its losses widened and it failed to achieve the lofty delivery targets it set prior to its public debut. Nikola's founder and former CEO Trevor Milton was also convicted of securities and wire fraud last year, while rising interest rates exacerbated that selling pressure by crushing speculative growth stocks.

Nikola's battery-powered semi truck.

Image source: Nikola.

Yet Nikola's prospects brightened briefly this year after several positive developments. It ramped up its deliveries of its battery electric vehicles (BEVs), reiterated its goal of delivering its first hydrogen-powered fuel cell electric vehicles (FCEVs) this year, and secured a five-year order from the hydrogen fuel and transport equipment BayoTech for 50 of those FCEVs.

The California Transportation Commission also greenlit a $42 million grant to fund Nikola's construction of six hydrogen stations in Southern California with its partner Voltera. That's why Nikola's stock has nearly quadrupled from its all-time low of $0.52 per share on June 6. Unfortunately, three new red flags suggest it might be time to sell this stock.

1. Nikola is bringing in its fourth CEO in four years

When Nikola issued its second-quarter report earlier this month, it stunned investors by announcing that CEO Michael Lohscheller, who took the helm in February 2022, would step down immediately to deal with a family health issue. That was a bright red flag because Lohscheller was responsible for many of Nikola's recent improvements.

Under Lohscheller, Nikola ramped up its production of BEVs and set up firmer foundations for its FCEV business. It tried to stabilize its balance sheet by selling more shares, liquidating its battery pack subsidiary Romeo Power, exiting its European joint venture with Iveco, and laying off nearly a quarter of its workforce. Lohscheller also distanced Nikola from Trevor Milton and his unrealistic long-term projections.

Lohscheller will be succeeded by Steve Girsky -- who previously led the SPAC that merged with Nikola -- as its fourth CEO in as many years. To many investors, handing the reins over to Girsky might seem like a big step in the wrong direction. Although Girsky might not be as responsible as Milton for Nikola's unrealistic outlook, he still signed off on the initial merger.

2. Nikola faces a mass recall and suspension of its sales

In June, several of Nikola's BEVs caught fire at its Phoenix headquarters. At the time, Nikola claimed it was "foul play," which implied that someone had committed arson to manipulate its stock price. But the Phoenix Fire Department found no evidence of arson, and one of the damaged trucks which was being monitored caught on fire again in late July.

On Aug. 11, Nikola issued a recall for all the BEVs it had delivered so far, including 209 BEVs that are currently in the marketplace between dealers and customers. It also entirely suspended its sales of new BEVs. In a statement, Nikola admitted the previous fires had been caused by a coolant leak inside a battery pack of a single truck instead of foul play.

That recall will likely prevent Nikola from achieving its goal of delivering 250 to 300 BEVs for the full year, and it could disrupt its planned rollout of its FCEV in the third quarter. That's already a massive setback, but Nikola's initial eagerness to pin the fires on arson instead of its own technical flaws also raises some troubling questions about management's priorities.

3. Nikola approved a stock dilution plan

In one of his last moves as Nikola's CEO, Lohscheller pushed through a plan to double the company's share count from 800 million to 1.6 billion so it could raise additional cash through fresh stock sales. Selling more shares could further strengthen Nikola's balance sheet, which already saw its cash and equivalents nearly double sequentially to $227 million in the second quarter after it executed its aforementioned divestments and cost-cutting measures. 

It would also ensure that Nikola has enough cash to pay off its overdue interest on a $200 million loan it received from the hedge fund Antara Capital last year. However, this also means Nikola's existing investors will see their shares diluted as it floods the market with new shares.

That's a red flag for two reasons. First, Nikola's stock is already expensive at 11 times this year's sales (assuming it can still hit its BEV delivery target), and doubling its existing number of shares will make it even pricier. Second, there's no guarantee anyone will buy Nikola's shares after its recent setbacks -- so it might need to dump its new shares at a discount.

Nikola's future looks bleak in light of all these challenges. Therefore, I believe investors should stick with more reliable EV makers instead of betting on Nikola's Hail Mary attempt to revive its ailing business.