Nikola's (NKLA 7.23%) stock has plunged about 97% since its public debut on June 3, 2020. The electric semi-truck maker went public by merging with a special purpose acquisition company (SPAC) and initially dazzled investors with its ambitious goals.
But like many other SPAC-backed electric vehicle (EV) makers, Nikola struggled to ramp up its production and racked up steep losses. Its founder and former CEO, Trevor Milton, was convicted of securities and wire fraud last October, and it was recently forced to recall most of its vehicles and halt its shipments after several of its trucks caught fire.
Image source: Nikola.
As Nikola's stock hovers near $1 per share, some investors might be wondering whether it's a deep value play. To decide, let's review three reasons to buy Nikola and three reasons to sell it.
The three reasons to buy Nikola
The bulls believe Nikola's stock is worth buying for three reasons: the eventual recovery of its battery electric vehicle (BEV) business, the expansion of its hydrogen fuel cell electric vehicle (FCEV) business, and its dirt cheap valuation relative to other EV makers.
Nikola's BEV business had been recovering prior to its recent recalls. It delivered 131 BEVs in 2022 and 76 BEVs in the first half of 2023. That's well below its original target of delivering 1,200 BEVs in 2022 and 3,500 BEVs in 2023, but it proves Nikola can manufacture and deliver its BEVs at a steady rate. The recent recalls will likely derail its plan to deliver 250-300 BEVs this year, but it might get its production back on track in 2024 if it addresses the safety issues promptly.
Nikola still plans to ship its first FCEVs by the end of the year, and that business is off to a promising start. The hydrogen fuel and transport equipment company Bayotech placed a five-year order for "up to 50" of those FCEVs earlier this year, while the California Transportation Commission approved a $42 million grant to fund Nikola's construction of six hydrogen stations with its partner Voltera in Southern California.
Its first FCEV rolled off the assembly line in late September. The company says it now has the capacity to manufacture 2,400 FCEVs annually across three separate shifts.
According to Precedence Research, the global FCEV market could grow at a whopping compound annual growth rate (CAGR) of 53% from 2023 to 2032. If Nikola ramps up its production of FCEVs and keeps pace with the market's growth, its sales could skyrocket and economies of scale could kick in.
With an enterprise value of $1.15 billion, Nikola trades at just 3 times next year's sales. By comparison, Tesla (TSLA -1.11%) trades at 6 times this year's sales. So, if Nikola gets its act together, its valuations could rise as it's revalued as a stable EV maker. It could also become a viable takeover target for Tesla or another major automaker.
The three reasons to sell Nikola
The bears believe Nikola's pain will persist as it struggles with management issues, runs short on cash, and severely dilutes its own shares to raise capital.
Nikola recently brought on Steve Girsky as its fourth CEO in as many years. That choice probably didn't impress anyone since Girsky was previously the CEO of the SPAC that took Nikola public. Girsky's predecessor, Michael Lohscheller, also notably stepped down right before the company recalled most of its BEVs.
Nikola ended the second quarter of 2023 with $227 million in cash and equivalents, but most of that cash came from desperate cost-cutting measures, divestments, and capital raises. That's not a lot of cash compared to its projected net loss of $600 million for the full year.
Nikola was shouldering $615 million in total liabilities at the end of the second quarter of 2023, which gave it a manageable debt-to-equity ratio of 1.2. But after the quarter ended, it sold another $325 million convertible notes and doubled its share count to raise more cash.
Therefore, Nikola's leverage should rise significantly in the third quarter and make it even less appealing in this high-interest rate environment. To make matters worse, its rising debt and share count will likely increase its enterprise value, making it less attractive to value investors and its potential suitors.
Which argument makes more sense?
I believe Nikola -- like many other companies that hastily went public by merging with SPACs -- simply wasn't ready to operate as a publicly traded company. To this day, it's still acting like a start-up trading on ambitious promises of its future growth rather than any actual accomplishments.
Nikola isn't down for the count yet, but I don't see how it can overcome its brand-tarnishing BEV recall, ramp up its FCEV production, and prevent its balance sheet from crumbling at the same time. Its insiders have sold nearly four times as many shares as they bought over the past 12 months, so it doesn't seem like the management expects the company to overcome those formidable challenges. So, for now, I think it's smarter to sell Nikola than to buy it.
