Nikola Motor Co. (NASDAQ:NKLA) started trading on June 4 when Nikola stock opened at a price of $37.55. On June 9, it hit an intraday all-time high of $93.99. Now, NKLA shares are trading around $50. That is a wild ride in a matter of several weeks.
Nikola was founded in 2014. Until recently it has concentrated on heavy-duty fuel cell trucks. A March press release stated the group had “more than 14,000 pre-orders representing more than $10 billion in potential revenue and two-and-a-half years of production.” Yet the recent increase in Nikola stock mainly came after a tweet on June 8 by founder and chairman Trevor Milton. He used Twitter’s (NYSE:TWTR) platform to announce that the company would begin taking reservations for a new electric pickup truck, called the Badger in late June. Then on June 29, management announced that it was accepting pre-orders for the truck.
Today, I’d like to take a closer look at the company and what investors may expect from Nikola stock in the second half of the year.
How Nikola Stock Went Public
Phoenix-based Nikola Motor went public via a special-purpose acquisition company (SPAC). InvestorPlace readers may remember that Virgin Galactic (NYSE:SPCE) and DraftKings (NASDAQ:DKNG) have also gone public through such a transaction. SPACs have become an alternative method of going public instead of the traditional IPO route.
In a recently submitted thesis at the Department of Financeat Texas Christian University, James Griffin highlights “the SPAC raises money through a traditional initial public offering, conducts a target company selection process, proposes an acquisition to its shareholder base, then acquires the company if its shareholders approve of the choice. IPO proceeds are locked up in a trust account until management proposes an acquisition, at which point the funds are either used to acquire the proposed target (if the deal is approved by the shareholder base) or returned to shareholders in full (if the deal is rejected and no acquisition is made before the end of a two-year investment window). SPAC managers are typically constrained by a two-year time horizon during which they must propose an acquisition target to shareholders.”
Nikola merged with VectoIQ Acquisition Corp., a “blank check” publicly traded firm that was already listed on the NASDAQ. In general, these blank check companies look for a suitable business combination target for a potential reverse merger.
On the other side of the equation, by merging with a SPAC, a privately held company can avoid going through various steps and hurdles to go public or sell new shares.
Nikola Stock is Likely to Stay Volatile
Following the reverse merger agreed in March 2020, Milton stayed on as chairman. On June 4, NKLA stock opened at $37.55 and closed at $33.75. Its price increase since the announcement of the merger is mirroring the up moves the markets saw in SPCE and DKNG stocks.
Before discussing what to expect from Nikola stock, I’d like to first remind investors how SPCE and DKNG stocks have been trading since going public.
SPCE shares started trading on Oct. 28, 2019, at an opening price of $12.34. On Feb. 20, they hit an all-time high $42.49. On March 18, they saw a recent low of $9.06. Now, they are trading at about $16.
DKNG stock started trading on Apr. 24, 2020 at an opening price of $20.49. On June 2, it hit an all-time high of $44.79. Now, it is around $33.
It would be easy or possibly logical to attribute the choppy moves in both companies, as well as Nikola stock, as volatility to novel coronavirus pandemic or speculation in newly-listed companies. But there may be another reason behind these rather big moves.
Nikola Shares and the Stock Price
In a recent article published in SeekingAlpha, Edward Vranic, CFA, suggests that the rapid declines following the all-time highs are due to the mechanics of going public via SPACs. He says “this will guarantee a crash in the stock price in the near future as the stock’s float increases. The main reason why NKLA has had such an absurd ride … is because its float available for trading is far lower than its total shares outstanding.”
At this point, it’d be important to go back to the company’s SEC filing. Nikola currently has 360.9 million shares outstanding. Of that amount, public stockholders own 23 million shares which come from the VectoIQ Common Stock, representing approximately 6.4% of the total shares outstanding.
In addition “Private Investment in Public Equity” (PIPE) investors own 52.5 million of VectoIQ common stock, representing approximately 14.6% of the total shares outstanding. However, these PIPE investors own each share at a price of $10. Under the “Subscription Agreements” found on page 10 of the statement, “VectoIQ agreed that, within 45 calendar days after the consummation of the Proposed Transactions (the “Filing Deadline”), VectoIQ will file with the SEC (at VectoIQ’s sole cost and expense) a registration statement registering the resale of the PIPE Shares.”
In other words, PIPE investors have likely started cashing in on their investment. Vranic believes Nikola stock will likely go under $20 in a matter of weeks as PIPE shares become registered.
The Bottom Line on Nikola Stock
If you are not currently a shareholder, you may want to wait until the registration of the PIPE shares are complete. Until then Nikola stock is likely to be choppy and make lower lows.
Although I do not have a definite price target, I also believe there will further and rapid downward pressure in Nikola stock in the coming weeks. The shares may go well below $37.55, the opening price in early June.
In addition, if you’re considering investing in Nikola stock for the long run, you may want to see how the next several quarterly reports come out. With a newly-listed company, it is important to see the trend in its fundamental metrics. For example, management expects the company to start generating revenue in 2021. It’s important to see if that will indeed happen.
Are you one of those early investors who took a chance on the company’s stock? If you’ve been rewarded handsomely early on, then you may want to take some money off the table.
Alternatively, you may consider initiating an ATM covered call position. For example, an Aug. 21-expiry covered call would decrease the volatility in your portfolio and offer some downside protection.
We are likely to hear about moves in Nikola stock in the rest of the month.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
