Electric truck maker Nikola (NASDAQ:NKLA) has cooled off a little bit in recent weeks after a crazy run following its initial public offering. After peaking at around $94 earlier this month, Nikola stock has spent most of the past two weeks trading between $60 and $75.
Nikola bulls are happy to point to long-term projections for the electric vehicle market. They are quick to tell you that Nikola is the next Tesla (NASDAQ:TSLA). Demand is nearly limitless, and the company’s growth trajectory is astounding, they argue.
The hype surrounding Nikola has sent the stock’s market capitalization up to $25.8 billion. That growth represents about a 760% premium to the company’s valuation during its last round of private fundraising just last year.
At this point, I believe investors should stay away from Nikola stock. I’m as bullish as the next guy on the long-term outlook for EVs. But Nikola’s biggest problem isn’t its growth trajectory. It’s the lack of variant perspective among its investors.
Expectations for Nikola Stock Are Critical
One of the most well-known market catalysts out there is quarterly earnings. A big earnings “beat” can send a stock soaring, while a “miss” can trigger a huge crash. But earnings beats and misses depend on one thing — expectations. Most companies would be thrilled with 15% earnings growth. Shopify (NYSE:SHOP) investors would be horrified.
Expectations are typically based on consensus analyst estimates. The numbers themselves don’t actually impact share price directly. What matters is how those numbers compare to expectations. Even if a company reports 60% revenue growth, the stock will likely tank if analysts were expecting 70% growth.
In a nutshell, expecting what everyone else is expecting and being right likely won’t make you any money in the stock market. To truly be a successful investor, you need “variant perspective.” Variant perspective is an idea about a stock that is different than what the average investor thinks. In other words, successful investors not only predict the future. They must see the future differently than the rest of the market does and invest accordingly.
Nikola Versus Beyond Meat
More than Tesla, I believe Beyond Meat (NASDAQ:BYND) makes for an excellent comparison to Nikola stock. There is no question that Beyond Meat has reported some impressive growth numbers since its May 2019 IPO. Last quarter, revenue was up 141%.
But back on Sep. 10 of last year, I wrote about how there was simply no variant perspective in the Beyond Meat bull thesis. Everyone buying the stock simply expected astronomical growth. In the nine months since I wrote that story, Beyond Meat has done just that, reporting skyrocketing revenue. However, in that same nine months, BYND stock is down 7.8% overall.
The problem with BYND stock then and Nikola stock now is that they are already priced to perfection. Nikola’s $25.8 billion market cap is larger than Ford (NYSE:F) at $23.4 billion.
“Hydrogen trucks make sense. The problem is [Nikola CEO Trevor Milton] doesn’t have a plant to produce it, he doesn’t have a working truck and the stock is valued as if he’s going to take over the entire trucks space,” GLJ Research founder Gordon Johnson says.
Let that sink in. The stock is priced as if Nikola has already taken over the entire truck market. This is a company without a single product on the market.
How to Play NKLA
There are two dynamics that can play out for Nikola stock in the next few months. The first scenario is it will follow the path of Beyond Meat. The company will report staggering growth numbers and still the stock will underperform.
The other path it could follow is that of Tesla. In that case, irrational exuberance for the company and its stock will continue to push its share price higher and higher irrespective of its valuation. In other words, investors will only care about the company’s story, not its actual business numbers.
In either case, Nikola stock is a huge risk to buy at current levels. In a best-case scenario, traders may have the chance to buy very high and sell even higher like they have with TSLA stock in the past year. In a worst-case scenario, the EV bubble bursts and the stock comes crashing back down more in line with its $3 billion 2019 valuation.
The EV market is an extremely dangerous place to invest these days given the parallels I’m seeing to the dot-com bubble back in 2000. At this point, Nikola stock is little more than a speculative gamble that the bubble will inflate further before it bursts.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.
