I admire the enthusiasm from the bulls, but there was simply too much hype in Nikola (NASDAQ:NKLA). To a large extent, there still is too much hype. Nikola stock surged past $90 per share in June, as investors continued to bid this name higher.
With the stock north of $90, the company’s market capitalization was above $25 billion. I’m sorry, but that’s pure insanity. I’m all for open markets and letting price discovery happen naturally, but $25 billion for a company with no fundamentals is ridiculous.
That made Nikola more valuable than Ford (NYSE:F) and Fiat Chrysler (NYSE:FCAU). These two generate enormous sales and generally speaking, a solid bottom line. While the profit margin is admittedly low and there’s little growth, at least there is (usually) profit to be had.
With Nikola stock, we don’t even have sales!
Breaking Down Nikola Stock
Nikola stock did not go public in the way that most investors are familiar with. Usually, a company comes public in an IPO, where it raises funds directly and lists its stock on an exchange.
Instead, Nikola went with a special purpose acquisition company (SPAC). It’s sort of like an IPO but without the fanfare leading up to it. Essentially, a trust is formed and shares are offered to the public, with the proceeds being used to complete a merger or acquisition.
We saw a similar deal go through with DraftKings (NASDAQ:DKNG) and the concept continues to gain momentum.
In any regard, none of that matters too much now. It’s all about the future. On July 23, Nikola founder and executive chairman Trevor Milton tweeted that the company is breaking ground on its factory in Arizona.
“It’ll be up within 14 months and producing zero emission semi trucks off the assembly line,” he said.
If so, kudos to Nikola. In the meantime though, it’s hard to imagine assigning too high a valuation to this name. Look at how long it took Tesla (NASDAQ:TSLA) to gain traction.
Sure, it went on to garner a $300 billion market cap after a serious wave of momentum. But how many Teslas can the market have? Maybe Milton & Co. will have the “Musk factor,” which helps drive the share price higher. But with no real sales, there is no profit, and with expenses adding up, there is negative cash flow.
Years into operation, Tesla has built the most impressive electric vehicle platform available. But it still doesn’t produce a steady automotive profit. Every company has to start somewhere and I applaud Nikola’s efforts. I hope it pans out. But that doesn’t mean it’s an investment for everyone.
Trading NKLA Stock
So what type of investor does Nikola stock suit? Those looking for a speculative holding.
I don’t say that to suggest Nikola stock is some sort of subpar fly-by-night biotech sham. It has serious potential should it clear a series of obstacles and hit its goals in the future. Its trucks look great, but it needs to build its factory on time and roll those trucks off the lines while efficiently managing its cash on hand.
A spec holding is one that, in my view, has the reasonable potential of being a big winner in the future. But also one that has binary elements to it, in that it will either be a big success or a big failure. Obviously those who allocate funds to spec holdings are hoping it’s the former and not the latter.
As it pertains to Nikola stock price, shares have cooled off immensely. After ripping through $15 in May, shares quickly found their way to $93.99 in early June. July has been a different story, though.
Shares started off the month under significant pressure. While the 50-day moving average initially held as support, a big gap-down broke this level of support and ultimately sent shares down to $30. I want to see if this mark holds as support. On a bounce, let’s see if shares can get back to $42. Above puts the 50-day and 20-day moving averages in play.
A break of $30 puts $20 and the 200-day moving average in play. I would expect, at the very least, a bounce from this mark should it come to fruition.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
