Down 46% year to date, electric truck maker Nikola (NKLA 1.28%) has missed the market rally that boosted electic vehicle peer Tesla (up 153% in the same period). This comes as the smaller company grapples with production issues and weakening financials. Let's dig deeper to explore whether or not Nikola's future will be brighter than its past.
A challenging past and present
Nikola hit public markets through a reverse merger with a special purpose acquisition company (SPAC) in June 2020. Initially, shares performed well -- eventually soaring to an all-time high of roughly $80 that same year. At the time, investors were optimistic about Nikola's prospects of rapidly scaling up production of its trucks and batteries, along with its hydrogen fuel cell technology, which promised the potential for higher ranges and faster fueling times compared to traditional electric vehicles (EVs).
Since then, Nikola shares have collapsed over 98% as it continues to be wracked by operational underperformance and scandals. For example, in 2022, former CEO Trevor Milton was found guilty of making fraudulent statements about the company's technology to jack up its stock price. And it has changed leadership a whopping four times in four years.
A company's past results don't necessarily reflect future performance, but it can give clues about whether or not its business strategy creates shareholder value. And unfortunately for Nikola, its past challenges have not been resolved -- especially on the operational side.
Operational results remain weak
Second-quarter revenue dropped by around 15% year over year to $15.4 million. Nikola only produced 33 trucks -- down from 50 in the prior year. And in August, it recalled all its battery-electric trucks delivered to date (209 units) and suspended sales after discovering a design flaw that could cause fires.
The automaker generated a second-quarter operating loss of $168.6 million. And it has no clear pathway to profitability because revenue isn't growing and is nowhere near enough to put a dent in costs.
With just $226.7 million in cash on its balance sheet, Nikola must raise external capital (issuing debt or new shares) to maintain operations. In August, management won shareholder approval to increase its share count from 800 million to 1.6 billion to raise capital. This move follows the decision to lay off 270 workers (23% of its workforce) to cut costs.
What could the next five years look like?
There is no guarantee that Nikola will still exist in the next five years. The company's weak financial condition and lack of growth could eventually lead to some sort of restructuring. But even if the embattled automaker survives, it looks unlikely to create shareholder value over the long term.
With revenue stagnant and costs spiraling out of control, don't expect profits anytime soon. And management may be forced to rely on continued share issuance to fund operations. While this can help avert bankruptcy, it causes equity dilution by lowering the fundamental value of all existing shares relative to current and future potential earnings. In a sense, it takes money from investors with the hope of making it back. And unfortunately for Nikola shareholders, that looks like a tall order.
Nikola's history of leadership scandals and recalls could create a negative feedback loop that reduces demand. Even if it scales up production, customers could be less likely to risk buying a vehicle from a company with such a poor track record -- especially one that might not even exist when they need maintenance and other forms of post-sale support in the future.
Considering these challenges, it's hard to see a light at the end of the tunnel for Nikola or its stock.