There’s a great deal to like about Nikola (NASDAQ:NKLA) and Nikola stock. The company, which makes trucks that use a combination of electric motors and hydrogen fuel cells, is tapping into a clear hunger within our society to reduce carbon dioxide emissions.
Yesterday its shares more than doubled amid a suddenly roaring stock market and a strong desire among investors to find the “next Tesla.”
Nikola has already established partnerships with multiple large equipment makers and received thousands of orders for its trucks, while its technology sounds very promising. However, given the limitations of trucks fueled by renewable energy at this point and the high market cap behind Nikola stock, there are reasons to be cautious over the medium term.
In the long-term, however, the company’s business could really take off, making its shares worth buying on sharp pullbacks. Let’s take a deeper look into what makes Nikola stand out from the crowd.
Reasons to Like Nikola in the Short Term
To many investors, Nikola’s stock will look like a great bet in the coming weeks. As the periodic rallies of Nio (NYSE:NIO) stock have shown, there’s a tremendous desire on the Street to invest in the next highly successful electric-vehicle maker. Moreover, with oil prices climbing again, alternative energy stocks are once again surging. For example, over the last week through yesterday, Plug Power (NASDAQ:PLUG) had jumped 23%, solar module maker JinkoSolar (NYSE:JKS) climbed 22.6% and Nio soared 40%.
Add to this the fact that Nikola was — like Tesla (NASDAQ:TSLA) — founded by a billionaire with a technical background and there’s room for it to enjoy a similar “X factor” that Tesla does with Musk at the helm. This potential is even greater when you consider its established partnerships with a few large companies in the trucking sector: parts maker Wabco, which was recently acquired by giant German auto parts maker ZF; prominent truck leasing company Ryder (NYSE:R) and Bosch, another large vehicle parts maker.
Meanwhile, Nikola says that it has obtained orders for 14,000 of its fuel-cell trucks that could be worth up to $10 billion. I’m not surprised that there has been significant demand for the company’s fuel-cell trucks; in a column on Plug Power that was published on March 2, I wrote: “There’s a great deal of evidence to suggest that the demand for … [fuel cell-powered] trucks will be meaningful. As everyone knows, many businesses and governments are looking to reduce the use of gasoline in order to lower pollution and combat global warming.”
And I predicted that Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) would want to put green trucks on the road in order to”impress the young, environmentally conscious consumers who make up a high percentage of e-commerce customers.”
In general, I think that, to impress environmentally conscious consumers, a significant number of large consumer-facing firms will seek to buy hundreds of “green” trucks. And in a few places, including California, Europe and New England, governments may even give companies monetary incentives to use “green” trucks.
Reasons to Be Cautious About Nikola in the Medium Term
Trucks powered by hydrogen fuel cells and batteries have some notable limitations. As I noted in my column on Plug Power, “battery-powered electric trucks require a great deal of electricity.” Furthermore, I reported that such trucks “require huge batteries to travel just 250 miles.” Those issues are likely key reasons why Nikola says that its battery-powered trucks can only be driven for “up to 300 miles” on one charge.
Still, trucks powered by hydrogen fuel cells have important advantages over those that use batteries. Specifically, fuel cells are much lighter than batteries, can power trucks over a much longer distance and can be recharged much more quickly. In fact, in order to travel 350 miles, “16,000 pounds of batteries” are needed. Conversely, about 4,120 pounds worth of hydrogen and storage tanks are necessary to power a truck over the same distance.
And Nikola says that while its battery-powered truck, which it expects to start selling next year, will take “several hours” to recharge, its fuel-cell trucks, which are slated to be sold starting three years from now, can be recharged in 10-15 minutes.
The company is reportedly working on a new type of battery that includes 100% more “energy density” than lithium ion batteries. But it says that it’s still developing these revolutionary batteries.
Demand for battery-powered trucks is likely to be quite limited; at least in the U.S., their range is way too short for most applications. Indeed, truck maker Peterbilt thinks that “refuse, regional, and urban pickup and delivery” are the best ways in which battery-powered trucks can be used.
Meanwhile, hydrogen costs about $5.60 per gallon, versus $3.24 per gallon for diesel in California and less than $3 in most other states. Furthermore, the hauling capacity of hydrogen trucks is likely more limited than diesel trucks because of the relative heaviness of the hydrogen and storage tanks.
Hydrogen trucks are likely to be more attractive in Europe, where countries are much smaller and fuel prices tend to be meaningfully higher. But the extent to which Nikola can tap the European market is unclear, although its partnership with ZF can further its efforts on the continent.
Nikola is facing meaningful competition from a couple of huge companies. That’s because Toyota (NYSE:TM) and Hyundai (OTCMKTS:HYMTF) have both launched hydrogen-powered trucks.
Meanwhile, Plug Power, in partnership with Lightning Systems, has also entered the hydrogen-powered truck market. And on May 6, Plug’s CEO, Andy Marsh, said that demand for its hydrogen-powered vehicles had come in below expectations. That doesn’t bode too well for Nikola’s outlook.
The company has also developed a pickup truck called the Badger, which will be powered by a combination of batteries and hydrogen. But many are skeptical about whether there will be a sizable market for electric pickup trucks, even though Tesla has received hundreds of thousands of pre-orders for its Cybertruck. The current low cost of gasoline and Nikola’s lack of name recognition among consumers could limit demand for the Badger in the near-term.
Finally, despite the $10 billion of orders that Nikola says it has received, the company is only targeting revenue of “$150 million in 2021 to $3.2 billion by 2024,” according to Forbes.
Nikola Has Positive Long-Term Catalysts
In a couple of years, I think that Nikola could grow into its current $26.4 billion market cap. The cost of hydrogen is expected to drop meaningfully in coming years, likely making hydrogen-powered trucks much more viable and popular.
Within a year or two, the company could unveil its new, improved batteries, the attributes of which may trigger tremendous demand for its battery-powered vehicles. And it could create a sizable network of hydrogen stations, enabling it to profitably sell “green” hydrogen to trucks made by many companies.
The Bottom Line on Nikola Stock
In the short term, as long as oil prices don’t plummet and the stock market doesn’t slide, I think that the shares could conceivably jump to a market cap of $60 billion. That would represent a gain of over 100% versus the shares’ current levels. It would also be about 20 times the $3.2 billion of revenue that the company says it expects to generate in 2024. For comparison, in 2012, Tesla’s trailing price-to-sales ratio reached 21.
But because Tesla’s success has created such excitement about electric vehicles, I think Nikola’s stock could reach 20 times its estimated 2024 revenue. Within a couple of months, however, I think the euphoria around Nikola is likely to drop as investors and analysts realize the limitations of hydrogen trucks.
Furthermore, the company will probably sell many more shares to raise more money to fund its operations. As a result, its shareholders could be heavily diluted at any time.
Risk-tolerant, short-term traders should buy the shares on their current strength. But longer-term, more risk-averse investors should wait for a pullback to the $40-$50 level before pulling the trigger.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer owned shares of Plug Power and JinkoSolar.
