There have been a lot of superlatives thrown at Nikola (NASDAQ:NKLA), the battery-electric and hydrogen fuel-cell truck maker since Nikola stock went public in early June through a reverse merger with a special purpose acquisition company.
While it’s not expected to generate any revenue until at least 2021, you’d be crazy to short its stock at this moment in time. Here’s why.
Even Mary Barra Admits Electric Is the Future
It might take a while, but even General Motors (NYSE:GM) CEO Mary Barra believes electric is the future. No doubt, the clean air we’ve seen in cities across the country in recent months due to reduced traffic during the novel coronavirus pandemic has shown car company executives what a cleaner automobile can do for the environment.
However, despite the apparent benefits of electric vehicles, Barra believes it will take decades before internal combustion engine vehicles (ICEV) disappear from America’s roads. When asked how long it will take, she didn’t hesitate to answer the question.
“In my almost 40 years of being at General Motors, I think that this is one of the most exciting times as we transition to electric vehicles,” Barra told Bloomberg recently.
“I think it will take longer [more than 10-20 years] than that. I think it’ll happen over a period of years and decades when you look at the transition that needs to occur.”
Barra estimates there are 250 million cars on the road in the U.S. Most of them are ICEVs. As CleanTechnica calculated in its report on Barra’s comments, that would suggest a minimum of 25 years to rid the U.S. of ICEVs, and that’s a bare minimum.
Well, that will surely please Exxon Mobil (NYSE:XOM).
But the writing is on the wall, which means young companies like Nikola have a better shot at survival today than they would have had 12 years ago when Tesla (NASDAQ:TSLA) sold its first Roadster in 2008.
The world is becoming more accepting of electric vehicles. Only the cost and range are holding back total adoption.
Why I Wouldn’t Short Nikola Stock
Nikola doesn’t expect to hit $1 billion in annual revenue until 2023.
According to InvestorPlace’s Larry Ramer, Nikola is expected to start selling its battery-powered truck in 2021, and its hydrogen fuel-cell powered trucks in 2023. By the time we get to 2023, Nikola should have several different products on the road. Whether it can get to $1 billion by then is the million-dollar question.
But is that enough of a question mark at this point to pay 600% borrow fees on Nikola stock? At the June 15 closing price of $68.45, the daily borrow fee on 100 shares would be slightly more than $112 [100*$68.45*600%/365] per day. To hold for a month would cost $3,360. Nikola stock would have to drop precipitously to deliver a return on your borrow fees.
“Any time you have rates above 100 per cent you’re hoping that the stock falls precipitously in a very short term so you don’t have to pay a full year’s financing costs,” said S3 Analytics managing director Ihor Dusaniwsky. “[If the stock] continues to trend upwards we should expect a short squeeze.”
While a short squeeze is a possibility at this point – short sellers are said to have lost $250 million in the first half of June – it’s also wise to acknowledge that Nikola’s stock’s been driven higher on speculation it’s the next Tesla.
My InvestorPlace colleague, Luke Lango, certainly thinks so. He feels it could soon be worth $100 billion. I think that’s a bit of stretch. Tesla’s only worth $183 billion, and it could see 100,000 Model 3 deliveries from its Shanghai Gigafactory in just its first year of operation.
There is no comparison other than they both are after buyers of electric vehicles.
The Bottom Line
There’s no doubt that Nikola is an intriguing business. I’ve been a fan of electric and Elon Musk for a long time. I would welcome anyone building upon Musk’s legacy as one of America’s great innovators.
Ten years ago, Nikola wouldn’t have had a chance. Today, as long as it gets enough funding, the possibilities are real. Consumers want electric vehicles, and they want variety and choice. If Nikola adds to the pool, I could see it sticking around.
While I can see why shorts are attracted to Nikola, the borrow fees seem like a dealbreaker to me.
I wouldn’t go long or short on Nikola right now, but that doesn’t mean you can’t.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
