Nikola's (NKLA +0.00%) stock has been nothing short of a catastrophe for its early investors -- with its share price down by a whopping 99.2% from its all-time high of around $80, reached in mid-2020. Over the last four years, this once-promising company has faced non-stop scandals and underperformance. But is Nikola doomed -- or can it turn its fortunes around in the next five years and beyond? Let's dig deeper.
What went wrong for Nikola?
Nikola was founded in 2014 and went public six years later. It aimed to pioneer zero-emission semi-trucks that could run on hydrogen fuel cells. Compared to lithium-ion electric vehicle (EV) batteries, hydrogen-based energy technologies offer several key advantages that could make them particularly useful for the unique needs of freight trucking, such as higher ranges, lower powertrain weight, and lower refueling times.
OTC: NKLA
Key Data Points
But while hydrogen fuel cell trucks have potential, they don't seem ready to generate shareholder value yet. Over time, traditional electric vehicle batteries have gotten cheaper and more energy-dense, with Goldman Sachs projecting a 40% decline in price per kilowatt hour by 2025 (compared to 2022 data). This erodes the advantages Nikola could have potentially gained by hitching its wagon to a rival technology.
Nikola also faces several company-specific problems. For starters, it isn't very trustworthy or respected after its founder, Trevor Milton, was charged with three fraud counts related to exaggerated claims about the automaker and its allegedly zero-emission trucks. But perhaps more importantly, Nikola's operational results are in a tailspin.
Tracking toward a bankruptcy filing?
In the third quarter, Nikola only sold three trucks (down from 63 in the prior-year period), and, remarkably, it generated revenue of negative $1.73 million. You heard that correctly: Negative revenue. This bizarre situation occurred because Nikola had to buy back seven trucks from former dealers as it exited most U.S. states to focus on California.
Nikola's also faced a costly recall of 209 of its Tre Battery-electric trucks after discovering a potentially flammable coolant leak in August. This $61.8 million charge helped contribute to a third-quarter net loss of $425.8 million. These struggles could create a negative feedback loop where dealers and buyers become reluctant to purchase Nikola products, because they fear the company could eventually cease to exist and be unable to provide post-purchase support and maintenance.
Image source: Getty Images.
Nikola stock is not a buy
Despite losing over 75% of its value over the last 12 months, Nikola stock is still too expensive. With a price-to-sales (P/S) multiple of 13, it is arguably pricier than Tesla (P/S of 7.7) despite generating no revenue or earnings in its most recent quarter. But while shares look almost certain to underperform over the next five years, bankruptcy isn't guaranteed.
Unviable public companies can last a surprisingly long time by relying on outside sources of capital, such as equity dilution -- a fancy way of saying they create and sell more units of their own stock. In December, Nikola used this strategy to raise a combined $300 million from stock and convertible notes (a type of debt that can be converted to stock in the future). While this helps kick the can down the road, it can hurt investors over the long run by reducing their claim of future potential earnings. Shares in Nikola should be sold or avoided.
