Does it make any sense for investors to buy Nikola (NASDAQ:NKLA) stock at current levels? In any other market, the answer would be a resounding “no.” But in today’s “bubble amid the turmoil” market? All bets are off. The underlying economy may be struggling due to the novel coronavirus. Yet, with speculation trumping fundamentals right now, it’s possible to see fast gains in stocks like this one.
However, there’s a caveat: it’s a game of musical chairs. Sure, this electric vehicle maker’s stock could head higher. Even though it won’t even start production of its flagship Badger electric pickup until 2022.
But, what happens when the music stops? It’s not a question of if, but when today’s bubble pops. Although aggressive Federal Reserve policy has helped drive more money into stocks, predicting the market’s next move is a game of predicting the unpredictable.
With this in mind, it’s tough to see whether buying NKLA stock today is getting in on the ground floor. Or signing yourself up to “hold the bag.” In short, there’s no solid reason to buy this stock, even at its recent price (around $66.50 per share).
Conversely, shorting the shares is a dangerous game as well. The music may stop at any time, but you don’t know when that’s going to be. Just like the Tesla (NASDAQ:TSLA) skeptics losing billions, don’t risk your portfolio by being a hero and shorting this “too hyped to touch” play.
Yet, if you want to take a gamble (on the long or short side), here’s how bull and bear scenarios could play out in the near-term.
How Frothy Nikola Stock Could Head Higher
It seems irrational to buy a stock that has a $24.4 billion market cap yet essentially zero revenue. Still, the company’s “development stage” nature doesn’t mean you should write off its investment merits completely.
How so? A lot of the press around this company right now is focused on its Badger passenger trucks. But, it’s the commercial truck segment that could offer the biggest potential.
Unlike Tesla, Nikola’s commercial trucks are hydrogen-electric, not battery-electric, powered. Sure, the company needs to build out a hydrogen refueling infrastructure to make this work. But, with a longer driving range than Tesla’s Semi, the rival could grab significant commercial truck market share in the coming years.
That’s why Cowen’s Jeffrey Osborne recently gave the company’s shares a “buy” rating, and a $79 per share price target. With potentially lower operating costs than diesel, the analyst sees big opportunity for this company in the commercial space.
I agree that this bull thesis makes sense. It’ll be years until Nikola achieves tangible success. But, as it makes progress on this ambitious goal, shares could continue to climb higher. However, there’s one big red flag that could mean buying shares today isn’t the best move.
How a Tesla Wanna-be Could Tumble From Here
In today’s stock market, which has eerie parallels to the dot-com bubble of 1999-2000, it’s too risky to short stocks on valuation alone. This company trades at a jaw-dropping enterprise value/sales (EV/Sales) ratio of 59,413x However, just a breadcrumb of positive news could send the stock back to its 52-week high (around $94 per share). And beyond.
Yet, there’s a big reason outside of valuation why Nikola stock could head lower.
What am I talking about? Insider selling is on the horizon. As this commentator noted, early investors are looking to sell most of their positions. Out of about 67.7 million restricted shares held by these investors, they plan to unload 52.5 million of these onto the public markets.
In other words, if the EV-maker’s smart money sees it to be prime time to cash out, why should you buy now? Sure, other story stocks” are seeing insider selling right now, like Virgin Galactic (NYSE:SPCE). But at least with Virgin, it’s mainly one insider looking to cash out.
Too Risky to Buy, Too Risky to Short
I can see the potential with this “too hyped to touch” green stock. The company may have essentially zero operations right now. But, if its hydrogen-electric offerings can disrupt the traditionally diesel-powered trucking space, it could become a major player in coming decades.
Yet, keep things in prospective. It’s the story, not actual results, driving this stock right now. For all the criticism you can lay on Tesla, at least Tesla has tangible results to tout. And while that company has yet to post four consecutive quarters of profitability, it’s practically a blue-chip compared to this company.
Nikola stock? It’s basically a publicly traded startup. But while upcoming insider selling could send shares lower, it’s still too risky to short right now. So, what’s the play? Stay on the sidelines.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.