Why Investing in Electric Car Maker Nikola Is Gambling

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When it comes to electric vehicle maker Nikola Motor Company (NASDAQ:NKLA), investors are being driven by hope and irrational exuberance for Nikola stock.

How else to explain a market capitalization of $23.82 billion for a start-up company that has yet to manufacture a single electric vehicle and said publicly that it doesn’t expect to generate any revenue until 2021 at the earliest. That’s zero revenue before 2021, not profits. Nikola is also a company that currently employs about 250 staff. It secured its very first analyst rating on June 17 from Cowen Inc. (unsurprisingly, the rating is a “buy” with a price target of $79 per share).

A Wild Ride for Nikola Stock

Phoenix, Arizona-based Nikola is buoyed by excitement over the potential of the electric vehicle market and charismatic founder Trevor Milton. He vowed to be among the most transparent tech leaders and has more than 50,000 Twitter followers.

It’s certainly been a wild ride for NKLA stock. That started when the company’s shares began trading on June 4 after a reverse merger with VectoIQ. VectoIQ is a publicly-traded special purpose acquisition company headed by former Vice Chairman of General Motors Stephen Girsky.

NKLA stock has literally risen 20% and fallen 20% in the same day during furious trading sessions where shares trade hands at breakneck speed. On more than one occasion, trading in NKLA stock was halted due to extreme volatility. And the stock price doubled on multiple trading days, only to slide downward.

In recent days, the stock price swung from $55.01 to $71.56 a share, before leveling out at around $65 per share. The question facing Nikola moving forward is can the company deliver on investors’ lofty expectations?

The Elephant in the Room

Of course, you can’t talk about Nikola without acknowledging the elephant in the room – Tesla (NASDAQ:TSLA).

Both companies take their names from Nikola Tesla. This eccentric inventor, engineer and futurist helped design the modern alternating current (AC) electricity supply system that powers batteries. And, both companies aim to shake-up the automotive industry with vehicles that are 100% powered by electricity and operate using long range batteries.

Much of the current hype around Nikola stock is driven by investors who think they’re getting in on the ground floor of the next Tesla car manufacturer. The bet is that NKLA will enjoy a similar run up to TSLA shares, which have more than quadrupled in price over the past 52 weeks and now hover near $1,000 each.

A Comparison to Tesla

While the excitement maybe understandable, there are some important difference between Nikola and the company it aspires to be.

First of all, Nikola is focusing almost exclusively on the popular U.S. truck market. The company is taking pre-orders on its upcoming Badger truck, which won’t go into production until 2022 at the earliest.

In this respect, Nikola faces stiff competition from traditional carmakers such as Ford (NYSE:F), General Motors (NYSE:GM) and Toyota (NYSE:TM). All make popular pick-up trucks, and each of which is expanding into fully electric vehicles.

Ford’s F-150 pick-up truck has consistently been the bestselling vehicle in the United States since 1977 and has tremendous brand loyalty.

Also, Tesla established a diverse line-up of sedans, including its Model S and Model 3 cars. Tesla is now expanding its line to include the Model X sport utility vehicle, futuristic Cybertruck and sports cars with its Roadster model.

Many analysts expressed skepticism that Nikola will be able to compete and survive with a business model that is focused exclusively on the pick-up truck market, popular though it may be.

Yet Milton, Nikola’s founder, recently doubled down on his company’s all-in focus on trucks. He said in an interview with CNBC that his goal is to match the popularity of the Ford F-150. Ironically, Nikola’s current market capitalization makes the start-up more valuable than Ford, the original automaker.

Are Nikola’s Goals Realistic?

Nikola’s chief cheerleader certainly has big goals for the company. By 2027 Milton is forecasting production of 30,000 hydrogen fuel cell electric trucks. He claims that it has already received $10 billion worth of Badger pre-orders. Nikola raised more than $700 million through its reverse merger earlier in June, as well as from investments from Fidelity Management and Jeff Ubben’s ValueAct Spring Fund.

Still, are Nikola’s goals realistic?

Beyond the internal functioning of the company, there is the broader electric vehicle market to consider. According to Statista, a total of 245,000 battery-powered electric vehicles were sold in the U.S. in 2019 (less than 2% of the 17 million total vehicles sold).

Sales of Tesla models accounted for almost 80% of all electric vehicle sales. Second-ranked Chevrolet accounted for 7% of U.S. electric vehicle sales.

Enthusiasm Is in Short Supply

The reality is that Americans have been slow to embrace fully electric vehicles. Part of the problem is the lack of infrastructure to support electric vehicles, notably public charging stations. Another is the expense, as electric vehicles cost, on average, 81% more to buy than a conventional gasoline powered vehicle.

The lukewarm reception from the public is part of the reason why established automotive companies such as Ford and General Motors have struggled to bring electric vehicles to market. For traditional automakers, creating electric vehicles has proven to be a game of one step forward, two steps back.

Can Nikola break the mold and replicate the success of Tesla in designing vehicles that capture the public’s imagination? Tesla Chief Executive Elon Musk, for one, is doubtful. He recently called Nikola and its business model “staggeringly dumb.”

Musk took issue with Nikola’s focus on using hydrogen energy to power electric vehicles rather than more conventional batteries. Hydrogen energy, while abundant, is much less efficient than battery power, according to Musk.

The Bottom Line on Nikola Stock

Given the lack of products and revenue, NKLA stock can best be called “speculative” at this point. At worst, investors are gambling on an unproven company operating in an unproven market.

For these reasons, rational investors who do not treat the stock market like a casino would be best advised to take a pass on Nikola shares at the present time.

That said, investors are likely to defy logic when it comes to Nikola stock just as they have ignored the concerns raised by analysts over TSLA stock. Elon Musk himself has taken to Twitter to state that his company’s stock price is too high at current levels. After a brief dip following Musk’s comments, TSLA stock continued to march higher.

As of this writing, Joel Baglole did not hold shares in any of the aforementioned companies. 

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/why-investing-in-electric-car-maker-nikola-is-gambling/.

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