Growth stocks are having a big week in the markets. Some of the more speculative plays that depend on access to affordable capital are leading the way. One of those speculative companies is electric heavy truck maker Nikola (NKLA 7.23%).
The leading market indexes rose more than 2.5% this week, as of early Friday. Yet Nikola shares have skyrocketed nearly 30%, according to data provided by S&P Global Market Intelligence.
Cheaper capital ahead
On Wednesday the Federal Reserve announced it would be keeping interest rates steady, which was expected. Investors also hoped the Fed would signal that the current level of rates would represent a peak with the next moves being lower. That's exactly what happened.
It now appears the Fed is on the verge of a pivot toward a cycle of lowering rates. That will mean access to lower-cost capital for start-up companies like Nikola that need to fund growth. Nikola has already tapped the equity and debt markets several times in 2023 to bolster its balance sheet. Looking toward the next couple of years, Fed policymakers have implied they expect the federal funds rate to drop meaningfully from the current range of between 5.25% and 5.5% to below 3% for 2026.
Major risks remain
Nikola is in a particularly capital-intensive position as it seeks to grow both the infrastructure and market for hydrogen-fueled electric semitrucks. The expected lower interest rates will reduce the cost of borrowing for its capital projects, expansions, and research and development needs.
The more favorable interest rate environment is what drove investors into Nikola shares this week. But Nikola doesn't have much leeway to make things work. It pushed shareholders hard this year to approve the authorization to increase shares so it could use equity to raise money.
That means more dilution for existing shareholders is likely coming. An investment in Nikola could still pay off handsomely if it is successful in becoming a leader in hydrogen fuel cell-powered trucks. That operational success will determine if that's the case, or if the company and the stock don't thrive or even survive.
