Nikola (NKLA, Financial) has been the darling of the stock market in the past three months. Since the IPO in the middle of April, Nikola’s stock has had a wild run, from $11.74 per share to nearly $80 per share. It is currently trading at almost $38 per share as of the writing of this article, with a total market valuation of more than $13.65 billion.
We at Global Hidden Gems estimate that Nikola should be worth about $13 per share. Here's why.
A disruptor in a large growing global market
Nikola is considered a disruptor in the global truck market. The global Class 8 Truck market is estimated to be around $600 billion, with 7 million trucks in service. In the U.S. alone, the Class 8 truck market size is about $130 billion, with roughly 2 million vehicles in service. A $130 billion total addressable market includes $37 billion in trucks, $29 billion in service and maintenance and as much as $63 billion in diesel.
As many corporations are turning to greener but cheaper logistics solutions, both the fuel cell electric vehicle and electric battery vehicle markets are expected to grow significantly. In 2018, the electric battery vehicle market reached $150 billion and it is estimated to have a 16% compounded annual growth to more than $425 billion by 2025. The fuel cell electric vehicle market would have a much higher annual growth at 42%, from $830 million in 2018 to $11.6 billion in 2024. Nikola is currently the only company providing both electric battery vehicle and fuel cell electric vehicle solutions for long-haul and short-haul markets.
In the initial phase, Nikola will focus mainly on the largest private and dedicated fleets with significant distribution networks. It is a good strategy as it will be quite capital efficient for Nikola to build hydrogen stations in those dedicated routes. Nikola’s management projected that it needs a one-time capital expenditure of $16.6 million to support 630 leases in more than 21 years. As a result, the total station capital expenditure per seven-year truck lease came in at nearly $26,400.
The company plans to begin the production of battery electric vehicles in 2021 and fuel cell electric vehicles in 2024. By 2024, Nikola is expected to generate $3.2 billion in revenue and $213 million in Ebitda, with the Ebitda margin of 6.6%, according to its own guidance.
Shareholders are registered to sell shares
The future of Nikola the company could be quite bright. However, there are two issues that make us worried about Nikola the stock.
First, Nikola has not produced any revenue yet. The company plans to begin generating revenue in 2021. However, the bullish market momentum has driven up its market valuation a lot.
At the current trading price of $38 per share, Nikola is valued at more than $13.65 billion in the market. That is a 4.26 times the expected 2024 revenue multiple and 64 times the expected 2024 Ebitda multiple.
Compared to Tesla (TSLA, Financial), Nikola has a much higher valuation. Tesla is projected to produce $66.67 billion in revenue and $12 billion in Ebitda in the next four years. With the current trading price of $1,500 per share, Tesla has a market capitalization of $278.2 billion and an enterprise value of $283.55 billion. Thus, Tesla is valued at roughly 4.1 times expected 2024 revenue and only 23.6 times expected 2024 Ebitda.
Second, Nikola’s many existing shareholders are registered to sell most of their shares in the public market.
Source: Nikola's S-1 filing
In the company’s most recent regulatory filing, shareholders including Blackrock, Cowen Investments, ClearSky Power & Technology, M&M Residual, Steven Shindler and ValueAct plan to sell more than 249.84 million shares, accounting for more than 69% of the total shares outstanding. Notably, Trevor Milton, Nikola’s founder and chairman, and Mark Russell, the company’s president and CEO, also registered to sell their shares via M&M Residual and T&M Residual. M&M Residual is wholly-owned by Trevor Milton, while Trevor Milton and Mark Russell own T&M Residual. Those two companies have filed to sell nearly 131.5 million shares, or 36.3% of the company.
Nikola could be worth around $13 per share
In the recent filing, Nikola announced that its warrants, which allow warrant holders to buy Nikola stocks at $11.50 per share, could be exercised. Assuming all warrant holders exercise their conversion rights, Nikola would issue roughly 23.9 million new shares. The total number of shares would increase from 360.9 million to nearly 384.8 million, diluting existing shareholders by 6.62%. Because Nikola's current share price is much higher than the exercise price, we think that many warrant holders will choose to convert their warrants into common shares (and then sell the shares to pocket a profit).
Assumng Nikola's forward price-to-Ebitda ratio were to reverto to the same 23.6 as Tesla based on 2024 Ebitda predictions, the market cap would be $5 billion. Assuming all warrant holders will convert their warrants into common shares, Nikola would have 384.8 million total shares outstanding. With a $5 billion valuation, Nikola's shares would be worth only $13 per share.
Conclusion
Nikola could become a real disruptor in the electric battery vehicle and fuel cell electric vehicle industries. However, it is a warning signal that a considerable number of shares are registered to be sold by founders, key executives and large shareholders in the stock market.
We think that those insiders feel that the market is overvaluing Nikola at the moment. If Nikola could meet its 2024 target, the current market valuation is still much higher than Tesla’s. Assuming a reversion to Tesla's forward valuation, we estimate Nikola is worth around $13 per share.
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
