Is Nikola Stock A Buy On The Dip?

Is Nikola Stock A Buy On The Dip? - Carbon Herald

Nikola Corporation stock (NASDAQ:NKLA) has been publicly traded for about a year, however, it experienced enormous volatility since then and spurred quite emotional disputes among investors. It peaked last June to a $93 high but then it bottomed by the end of 2020 to just above $13 which is nearly an 86% decline. 

This year the stock was trading at around $15 at the beginning of January and reached a high of $30.40 on January 27th, only to slide below $10 in April. Nikola stock price today is trading around $17 due to some positive news after an array of doom and gloom developments in 2020. Despite the volatility, the stock still has brought in profits for investors who bought it at the debut as it’s 77.53% higher since then. 

Should you buy Nikola stock at the dip right now? Many investors are wondering but the answer is (as usual) not a simple one. Nikola stock is a risky bet and there are indisputable arguments in favor of why we should avoid it. At the same time, the potential is there – global interest in disruptive hydrogen fuel cell technologies is rising and is attracting investments. 

The company has a massive opportunity to gain a share of the growing hydrogen market and if it has the capability to realize its ambitious strategy, the shares could rally exponentially. 

Cons of Nikola Stock

One of the most negative influences on Nikola stock price had the release of the Hindenburg Research report in September last year. The report accused the company and its founder Trevor Milton of lying about the technology Nikola has, calling it an “intricate fraud”. Among the many accusations was that the prototype of one the company’s trucks is not driving itself up to a cliff but actually rolling down an incline. The founder denied the report saying it never said the truck was powering itself. 

The whole argument caused the stock to plummet and many downward Nikola stock predictions to come out. By September 15, the SEC and Justice Department announced they’d be investigating the company over the allegations. A few days later, the founder, Trevor Milton resigned as a chair which sent the stock further to the downhill. 

Even though Trevor Milton left the company, the rest of the management that is also responsible for what happened is still there. Since the report turned out to be correct about some false statements made to investors, there is a heightened sense of unreliability about the company’s management. That and many other events have pointed out Nikola might not be able to deliver on its ambitious expansion plans. 

Consequences Of Undelivered Claims

One of the company’s partners – GM, has scaled back on the agreement to supply Nikola with hydrogen fuel cell technology following the SEC investigation. GM (NYSE:GM) also canceled its 11% equity stake in Nikola for $2 billion which sent the company’s market capitalization tumbling over 30%. The deal that previously boosted investors’ confidence in the disruptive company, had failed, resulting in a downward cascade for the business development. Without partners, the company is likely to experience capital liquidity issues and problems financing its promised hydrogen stations infrastructure and truck manufacturing.

The company’s value proposition is still intact – selling clients fuel cell electric vehicle bundles. These represent 7-year leases for 700,000 miles and include everything from fuel costs, maintenance, to the cost of the truck. That offer is disruptive for the market as it guarantees savings compared to diesel trucks. 

Apart from that, Nikola also plans to build hydrogen stations infrastructure across North America to serve the routes of its clients. That makes it not just an auto manufacturer but also an energy company, riding the wave of hydrogen as a truly essential fuel in a decarbonized economy. 

The problem is whether the company has the capability to deliver on its hydrogen infrastructure plans as it doesn’t gain footing in terms of management. It is not profitable and likely won’t be for a number of years. The company also has yet to deliver a single truck and doesn’t even have a factory for manufacturing them. 

It is building factories in Coolidge, Arizona, and Germany that according to management are near completion. It has communicated in its report that it will deliver the first Nikola Tre BEVs to customers during the Q4 of 2021. However, the market expects delays that could send Nikola company stock on a spiral.

Positive Developments for Nikola Stock

Some of the positive developments come from Biden’s promised infrastructure development investment. The company is counting on the growing hydrogen and renewable energy economy to support its planned hydrogen infrastructure and EV development as it also plans to offer EVs. The stock could get a boost if at least part of Biden’s spending proposal gets approved. 

The company announced in May some new partnerships – a collaboration with a Southern California trucking and logistics company for vehicle trials, and a plan to potentially order 100 Nikola battery-electric vehicles (BEV) and fuel-cell electric vehicles semi-trucks. The company also announced in its quarterly report that it is on track to build its first commercial hydrogen station this year and to name additional hydrogen ecosystem partners. 

Even though this positive Nikola stock news has given it a boost, the management did not deliver on its promise to bring new partners’ orders by the end of last year. It is still pre-revenue with multi-layered prerequisites that are needed to go right to roll out its infant technology.   

Conclusion

Considering the difficulty and cost of hydrogen infrastructure development, Nikola’s worrying projected cash burnout rate due to expansion plans and doubt over transparency and honesty by management, the stock is a premature investment. The company needs to prove it is worthy of taking half the name of genius Nikola Tesla. I would recommend a hold on buying for now until more concrete production developments and truck delivery data. 

Despite being a great potential upside on the hydrogen economy growth, the stock hides risks that can’t be disputed. If management shows a more stable footing on its ability to deliver both hydrogen infrastructure and hydrogen trucks and at an affordable price, I think it would be an excellent buying opportunity for the long-run. 

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Carbon Herald). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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