Many investors dream of betting on a low-priced penny stock that can deliver multibagger returns when its fortune improves. With a current share price of just $0.64, Nikola (NKLA +0.00%) seems to have that potential.
But sometimes cheap stocks are cheap for a reason. Let's discuss what the next five years could have in store for this embattled electric automaker.
What is the deal with Nikola?
Nikola shares hit public markets through a merger with a special purpose acquisition company (SPAC) -- a type of investment vehicle that allows stocks to list without the more rigorous standards of a traditional IPO. The company rode a wave of industry hype generated by rival Tesla, and its goal of developing semi-trucks that run on hydrogen fuel cells.
OTC: NKLA
Key Data Points
Compared to the lithium-ion batteries used in traditional electric vehicles, hydrogen fuel cells can theoretically offer longer ranges, faster recharging times, and lower weight, making them ideal for long-distance freight. Investors believed Nikola could establish an early-mover advantage in this opportunity.
By mid-2020, the stock hit an all-time high of roughly $80 before losing a jaw-dropping 99% of its value to date over poor operational performance. These challenges are far from over.
Nikola has failed to turn its hydrogen fuel cell concept into sustainable value for investors. While fourth-quarter revenue more than doubled (year over year) to $11.5 million, the company's gross loss expanded by 42% to $38 million. With negative gross margins, Nikola spends more to build and deliver its trucks than it can recoup by actually selling them. This dynamic can be fixed by scaling up operations, but Nikola's business is still trivially small, with just 42 trucks produced in the period.
What could the next five years have in store for Nikola?
If there is any silver lining for Nikola, it may be that it operates in a somewhat strategic industry. According to data from Statista, 23% of U.S. transportation-related vehicle emissions come from heavy-duty trucks. And the Biden administration is offering massive subsidies to help logistics companies adopt electric alternatives to their diesel-powered fleets. This program can help support demand for buyers to at least experiment with Nikola's products, despite the risks involved.
Image source: Getty Images.
But any opportunity may be short-lived. In its first-quarter earnings call, rival Tesla revealed plans to start high-volume production of its battery-powered semi-truck in late 2025. As Tesla is much larger and better capitalized than Nikola, it is hard to see the smaller company faring well in a competition over production volume, pricing, or specs.
Is Nikola a buy?
Although I hate to bet against innovators pioneering new technologies, Nikola doesn't look like a good investment. The company's top-line growth is anemic, cash burn is unsustainable, and competition from larger rivals like Tesla could put the final nail in its coffin over the coming years.
With its price-to-sales (P/S) multiple of 14, the stock is also surprisingly expensive considering its grim prospects. For context, the S&P 500 has an average P/S of 2.8, while electric automaker Tesla trades for just 6.2 times its sales.
With all that said, failing companies like Nikola can keep stumbling along for years through equity dilution, which involves creating and selling more units of their own stock. So I don't expect the company to go away anytime soon.
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