Of all the electric vehicle plays out there, Nikola Corporation (NASDAQ:NKLA) is one of the worst to hold. After peaking at $93.99 in June 2020, at the height of the EV hype, Nikola stock is in danger of falling to post-IPO levels.
Electric vehicles have seen greater interest as investors hunt for the next Tesla (NASDAQ:TSLA).
The trouble is, the expense of bringing a new electric vehicle to market and then getting people to buy it makes the failure rate a little higher.
Why should investors sell Nikola and never look back?
A Closer Look at Nikola Stock
Nikola enjoyed the momentum when its peer, Tesla looked as though it would head to $2,000. That illusion of upside ended when Nikola took advantage of the euphoria. On July 20 the company registered to sell up to 53.39 million shares. The news triggered a nearly 20% drop in its stock. The dilution will hurt shareholders.
The lack of a single sale of a Nikola truck is equally troubling. Still, the Tesla competitor opened reservations for the electric truck, called Badger, on June 29.
Trevor Milton, Nikola’s founder and chairman tweeted:
“We open up reservations for the most bad ass zero emission truck on June 29th. See the @nikolamotor Badger in person at #nikolaworld2020 this year. You’ll get to see a real operating truck, not a fake show truck. Expect stamped metal panels, functioning interior w/ hvac, 4×4, etc.”
More disconcerting is the company’s forecast of more than $10 billion in potential revenue from its pre-orders. Nikola, which emerged through a reverse merger with VectoIQ Acquisition, a special purpose acquisition company, has only an anticipated hydrogen network “to cover North America.” It is “set to become the largest hydrogen network in the world.”
These are all just promises for investors.
At an over $10 billion market capitalization, Nikola stock is worth around one-third that of Ford Motor (NYSE:F) or one-quarter of General Motors (NYSE:GM). That is an impressive valuation for a company that does not have any product on the market. By comparison, Ford is launching an all-new Bronco for the off-road terrain, refreshing the F-150, and selling the Mustang Mach-E EV for the first time. GM is building 2,700 new faster chargers in the United States.
Both GM and Ford generate respectable revenue levels despite the slowdown this year.
Upside Price Target
Analysts appear overly optimistic about Nikola’s value. The average price target is $56.00. If investors believed the hydrogen fuel market is more promising than EVs, they have better companies to consider instead.
For example, Toyota (NYSE:TM) launched the Mirai for 2020. Customers have 415,000 or three years’ worth of complimentary fuel as a bonus. BMW explained the benefits of fuel cell batteries here. And Hyundai is selling the NEXO Fuel Cell car in the U.S.
The Nexo is Hyundai’s second fuel-cell vehicle. The company is only expecting modest sales in the thousands. But if demand grows, consumers might stick with a well-established brand instead of buying a Nikola vehicle.
Investors are probably better off holding Toyota stock for the long-term period. After Toyota shares dipped last week, it is valued at a price-to-earnings multiple of around 9 times.
Its forward P/E is 13 times. This is a far better alternative to Nikola, whose infinite P/E is not meaningful. Speculating on Nikola may still pay off. Consider trading the stock on the bounce and getting out if the trend reverses. The company has yet to prove its business worth at this time. Until it showcases a prototype and completes its first sale, investors cannot properly assess its prospects.
At a macro level, markets are due for a correction. When Tesla’s stock failed to head toward the $1,600 – $1,800 level, speculators may have moved away from the EV space and on to another hot sector.
Disclosure: the author owns shares of Ford Motor Company.