Proceed With Caution and Expect Volatility From Nikola Stock

So far, August has been a good month for investors in Nikola (NASDAQ:NKLA) stock. In the first half of the month, Nikola stock is up around 35%.

On June 4, management released Q2 results. InvestorPlace readers would remember that Nikola stock began trading only in June. Therefore, the Street paid close attention to both the metrics and the outlook for the coming quarters. Initially, the shares rallied into the report.

But after the release of the numbers came a sell-off. Afterwards, risk appetite drove the shares over $45 on Aug. 10.

Now investors are wondering if the run-up in the share price of the zero-emission transportation start-up can in fact continue in the coming months, too. So today we’ll take a look at whether long-term investors should buy into the hot Nikola stock in August or wait for a pullback.

If you are not yet a shareholder, you may consider waiting for a potential profit-taking to push Nikola stock to $30 or even below. Here’s why.

A Pre-Revenue Company

Electric vehicle (EV) and alternative-fuel stocks have been getting a lot of attention on Wall Street lately. This holds true even for a young stock like Nikola.

In 2017, EV sales surpassed 1 million. In 2019, sales of electric cars topped 2.1 million globally. The 2019 sales accounted for 2.6% of global car sales and showed a 40% year-over-year increase. Between 2019-2027, the market is expected to grow from around $162 billion to $802 billion, showing a compound annual growth rate of 22.6%.

On June 4, Phoenix-based Nikola went public via a special-purpose acquisition company (SPAC), instead of conventional IPO. It merged with VectoIQ Acquisition Corporation, a “blank check” publicly traded firm that was already listed on the Nasdaq composite.

By merging with a SPAC, Nikola was able to avoid going through various steps and hurdles to go public or sell new shares. As a result, one share of VectoIQ stock converted into one share of NKLA stock. Following the reverse merger agreed earlier in March 2020, Trevor Milton, who had founded the company in 2014, stayed on as chairman.

Nikola is a pre-revenue company that is specializing in electric and hydrogen-powered trucks. It has not yet started formal commercial operations to produces its trucks, yet. And the Q2 results reflected that reality that there is no clear road to profits any time soon. Its total revenue of $30,000 was generated for selling solar panels.

InvestorPlace’s Chris Lau has recently discussed how the company has been mostly about talk and promises. Right now, it is valued at $15 billion. However, there is no revenue to justify that valuation. In comparison, Ford’s (NYSE:F) valuation stands at $28 billion.

If you’re considering investing in NKLA stock for the long run, you may want to see how the next several quarterly reports may come out. With a newly listed company, it is important to see the trend in its fundamental metrics. For example, management expects Nikola Motors to start generating revenue in 2021. It’d be important to see if that will indeed happen.

Should You Buy Nikola Stock Now?

On June 4, Nikola stock opened at $37.55.  NKLA shares had an incredible run-up on June 8, when it initially increased an eye-popping 103%. On June 9, Nikola stock is made an all-time high at $93.99.

The initial surge in price in June  followed a tweet by Milton in which he announced that the company would begin taking reservations for a new electric pickup truck.

Market participants were ready to bet Nikola stock may become the next Tesla (NASDAQ:TSLA) stock to hit new highs regularly. They also believe it can be more successful than fuel cell companies like Plug Power (NASDAQ:PLUG). Since June, NKLA stock has become one of the most-followed stocks on Robinhood.

On a side note, on July 13,  TSLA stock closed at an all-time high price of $1,794.99. On Aug. 11, Tesla announced a five-for-one stock split. Now TSLA shares are hovering around $1,400.

There is currently a lot of hype surrounding EV stocks as retail investors and day traders chase a number of these stocks on a given day, following a news release by one of the companies in question.

Put another way, a number of these publicly traded companies will likely see revenues and share prices grow. However, the recent quarterly results gave the market not much detail as to when the company can indeed start seeing revenue and profits. Therefore, long-term investors are urged to proceed with caution as volatility will likely become the name of the game in NKLA stock, too.

If you bought Nikola early, then you’ve already been rewarded handsomely and you may want to take some money off the table.

Alternatively, you may consider initiating an ATM covered call position. For example, an Oct. 16-expiry covered call would decrease the volatility in your portfolio and offer some downside protection. It’d also enable you to participate in a potential up move.

The Bottom Line

Technological developments, backing of many governments worldwide (including policies around financial incentives for buying electric cars, emission targets or city-access restrictions for fuel vehicles), and positive developments in driver perceptions are helping the EV industry to charge ahead.

Management would like to see Nikola become a leader in the  zero-emissions transportation industry. However, that process is likely to take a long time. In the meantime, the Street is likely to hear more about the wild price swings in NKLA shares in the rest of the year. I expect profit-taking to hit Nikola stock in the coming weeks, taking the price to $30, or even below.

Many investors would like to ride the EV wave. But they may not want to yet commit capital into Nikola stock. They could possibly consider buying into an exchange-traded fund. Examples include the iShares Global Clean Energy ETF (NASDAQ:ICLN), the ALPS Clean Energy ETF (CBOE:ACES), the SPDR S&P Kensho Clean Power ETF (NYSEARCA:CNRG), or the SPDR S&P Kensho Smart Mobility ETF (NYSEARCA:HAIL).

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education 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.

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