Nikola Corp. (NKLA), which began trading on June 4, has received a warm welcome from the public market. The upstart automaker, which is developing a range of hydrogen fuel cell-powered trucks, has captured the imaginations of many investors.
Investors are clearly enamored with Nikola’s innovative technology platform and intriguing initial vehicle lineup. Unfortunately, their exuberant enthusiasm appears to have drowned out realistic analysis.
An electrifying public debut
Nikola’s IPO was met with remarkable enthusiasm. After initially floating a public debut at $10 per share, Nikola opened its first trading session around $34 per share. The stock immediately began an upward run. Investors jockeying to get in on the action drove Nikola shares inexorably higher. Finally peaking at $93.99 per share, Nikola’s market capitalization briefly exceeded that of the Ford Motor Co. (F).
Last week, Nikola’s seemingly unstoppable bull run started losing steam amid profit-taking by investors and a market-wide retreat. The share price began to slip as a result of these pressures, eventually sliding more than 30%.
With a market capitalization now hovering near $24 billion at time of writing, Nikola is still priced for incredible sustained long-term growth. The young company will have to execute exceptionally well and grow its capacity and market at a staggering pace just to grow into its current valuation.
Reality check imminent
Nikola may soon struggle to maintain its lofty valuation. One threat may come from the imminent expansion of the company’s public float.
Of Nikola’s 360.9 million shares outstanding, only 156.96 million are currently trading. The remainder are subject to a lockup, a common practice among companies new to public markets. Lockups prevent insiders from selling out their holdings right out of the IPO gate, as flooding the market with stock sales risks threatening price stability and can drive the share price down. Meanwhile, an artificially tight float can also help to fuel an upward run, as tight supply meets fresh demand on the long side, while would-be short sellers struggle to find shares to borrow.
On June 15, Nikola filed a registration statement that will allow insider selling of up to 53.4 million shares on July 6. That represents more than 34% of the existing float. Even if carried out in a disciplined and organized manner, significant insider sales may result in substantial downward pressure on Nikola’s share price.
Maturity may hurt
Even great businesses can make poor investments. An asset, no matter its quality, can fail to deliver a positive return if an investor pays too high a price for it. On June 17, Matthew Klippenstein, an engineer and investor, highlighted this point very clearly:
“A soon-to-expire lockup period will expand the float, probably hitting the share price. But with $700 MM in cash and Iveco doing their first trucks, they've got runway. Good business models aren't always good stocks short-term, and vice versa: Their model of lease financing (for vehicle, maintenance, plus fuel) should indeed be far more lucrative than simply selling vehicles. Their hydrogen fuel cost will steadily drop over time. That said, OEMs and energy companies trade at dull multiples.”
Nikola’s business model is appealing, and its technology may set it apart as a long-term leader in fuel cell vehicles, but that must be weighed against the expectations already priced in. Having yet to book a single dollar of revenue, Nikola still has a lot to prove. Mature automakers are valued based on their tangible profitability, not hype or hope. As Nikola matures, it will inevitably face similar valuation dynamics. Thus Nikola’s operational success could, somewhat perversely, result in the long-term compression of its valuation multiple.
My verdict
Nikola is simply too richly valued by any traditional financial metric. The stock may jump higher in response to positive headlines, and its eye-watering market capitalization may find sustained support from an enthusiastic market, but these factors are ephemeral at best and can swiftly reverse in response to a shift in sentiment.
Ultimately, I cannot recommend Nikola, except possibly as a short-term speculative trade. Even then, the risks are significant, given the current economic climate. For investors who feel compelled to approach this name, I recommend moving with extreme caution.
Disclosure: No positions.
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