After all, Nikola keeps soaring. The stock only officially joined the public markets on Thursday after closing a merger with special purpose acquisition corporation VectoIQ. Nikola stock promptly rallied 6.6% on Friday — and then more than doubled on Monday.
The operating models are different. Nikola (for now) has no plans to enter the passenger electric vehicle market where Tesla has taken the lead. Tesla famously has controlled every aspect of production and sales, even upending the longstanding dealership model. Nikola is outsourcing production to a subsidiary of CNH Industrial (NYSE:CNHI).
Still, from a broad standpoint, TSLA is about as good a peer for Nikola as an investor can hope for. And even that imperfect comparison shows just how much success investors already are pricing into Nikola.
A $30 Billion Valuation
After Monday’s rally to over $73, Nikola incredibly has a market capitalization over $30 billion. Pro forma figures disclosed in a recent filing with the U.S. Securities and Exchange Commission cite a diluted share count of 361 million. There are another 24 million warrants with an exercise price of $11.50, and 41.1 million employee stock options with an average pre-merger strike price near $2.
Add it up, and there are 426 million shares outstanding, creating a pro forma market capitalization over $31 billion. Cash on the balance sheet totals about $1.2 billion, including the potential proceeds from options and warrants. Net out that cash, and the operating business is valued right at $30 billion.
From one perspective, that’s a staggering figure. Nikola generated just $482,000 in revenue in 2019 according to the same filing. From another, it might be cheap. Again, Tesla and Nikola are different companies. But what if Nikola could, roughly speaking, get to where Tesla is right now?
Tesla has a market capitalization of $176 billion. Net debt is a few million, putting its enterprise value around $180 billion.
If Nikola could — again, roughly speaking — become another Tesla, Nikola stock would rise about sixfold. Given the $1 billion-plus in pro forma cash, the company probably won’t need to raise more capital if it shows early success.
If it took Nikola a decade to “catch” Tesla, shareholders would make 20% a year. Even if took 20 years, annualized returns still would clear 9%.
Revenue Growth and Nikola Stock
That is probably too broad a way to look at it, however. Again, these aren’t the same companies. And some of the valuation assigned TSLA is based on potential profits from the Tesla Semi and the Cybertruck. Both companies can’t be the primary winner in those markets.
Tesla also has a solar business, and bulls believe it’s a leader in autonomous driving. Nikola plans to make money from its hydrogen business, but that business may not be as valuable, even assuming success.
It’s worth taking another tack, then. And one intriguing angle is to consider Nikola’s own projections for mid-term revenue. In its roadshow presentation, Nikola estimated 2024 revenue of $3.2 billion.
It took Tesla until 2014 to hit that level (almost exactly). And Tesla closed that year with a market capitalization of $28 billion.
From that perspective, being the “next Tesla” isn’t enough for Nikola stock at $73. Here, too, however, the comparison is a bit rough.
In Nikola’s favor is the fact that its margins should be higher, since it is outsourcing production. The company expects EBITDA margins around 25% at maturity. Tesla’s gross margins at best will be in the 30% range, and from there selling, marketing, and corporate costs have to be deducted. And, of course, Tesla at the end of 2014 was an absolute steal.
That said, Tesla has a far larger addressable market. Nikola estimates a global addressable market of $600 billion. For Tesla, the figure is in the trillions.
Investors might want to pay more for Nikola’s better margins. They could just as easily prefer Tesla’s broader reach.
The Data Points We Have
So what is Nikola stock worth? It’s impossible to pin the valuation down with any real precision. This is a company that will be valued on potential profits a decade from now, and the debate over those profits will rage in the meantime.
But even though the comparison to TSLA stock is imperfect, it does highlight legitimate valuation concerns. At the least, investors are pricing in something close to the success that Tesla has had. And TSLA has been one of the best stocks of the century, while there are no shortage of investors who still believe it is overvalued.
I’d add two more considerations. First, Nikola itself agreed to sell a good deal of stock at $10 per share just months ago. VectoIQ shareholders got their stakes at that price. As part of the merger, Nikola sold another $525 million in a private placement. Is Nikola management so conservative, or so short-sighted, as to sell shares at less than one-seventh their fair value?
Second, another stock is pricing in a quick retreat for Nikola stock. As part of its partnership with Nikola, CNH invested $250 million in the company. It now owns 25.6 million shares.
At Nikola’s current stock price, that stake is now worth nearly $2 billion. Yet even as CNH’s peers like Caterpillar (NYSE:CAT) have rallied, CNH has added just approximately $3 billion in market value. Its Nikola stake has added, according to the market, about $1.5 billion in a matter of weeks.
With no Nikola stock, CNHI could easily have seen a similar rebound. That’s another piece of evidence that suggests Nikola shares are pricing in something close to perfection. Maybe CNH is an interesting backdoor play. More likely, Nikola’s parabolic rally has gone too far.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.