Electric-truck maker Nikola (NASDAQ:NKLA) has been a hot topic among traders since the company went public via a SPAC, or special-purpose acquisition company. From the outset, Nikola stock traders enthusiastically bought into the SPAC hype along with the mania surrounding the electric-vehicle market.
To be honest, some of the excitement surrounding the Nikola SPAC was due to the concurrent run-up in Tesla (NASDAQ:TSLA) shares. At some points, the moves in Nikola stock almost exactly mirrored the price movements in Tesla stock.
Some cautious investors were concerned that the initial run-up in Nikola stock wasn’t sustainable. Those concerns were quite reasonable and the shares did indeed lose much of their value in July.
Is that a reason to give up on Nikola completely? Not necessarily. Momentum-focused traders probably don’t like what they’re seeing in the price action. Yet, long-term investors can view Nikola stock through a contrarian lens and thereby find a compelling reason to own the shares.
A Closer Look at Nikola Stock
I really like InvestorPlace contributor Tezcan Gecgil’s summary of Nikola stock’s first few days after being listed on the Nasdaq. As Gecgil put it, “Nikola stock started trading on June 4 when it opened at a price of $37.55. On June 9, it hit an intraday all-time high of $93.99.”
That should give you a fair idea of how hype can fuel a wild share-price rally. Nikola stock is a textbook example of an asset moving too far, too fast and too early based on “irrational exuberance” (to borrow a phrase from Alan Greenspan).
Suffice it to say that at July’s end, Nikola stock was trading at exactly $30 per share. That’s quite a comedown from the high of almost $94. Value-focused investors were concerned in the beginning, but now it’s the momentum traders that might abandon the ship.
Dumping the shares might prove to be a mistake, however. If Nikola stock was good at $90 or $60, then it should be terrific at $30. It’s not psychologically easy to buy stocks when they’re collapsing, but as they say, “No pain, no gain.”
A Warrant for the Stock’s Arrest
So, what precipitated the sharp decline in Nikola stock? Was it nothing more than the popping of a hype-fueled share-price bubble?
That’s probably a contributing factor. Yet, there may have been another factor at play here. It’s a phenomenon that could be called “warrant vesting.”
Warrants give people and institutions who own them the right to purchase shares of a stock at a discount. In that respect, they’re somewhat similar to in-the-money call-option contracts.
In the case of Nikola, 24 million warrants recently became eligible for exercise at the very low price of $11.50 per share. If you’re a retail trader reading this, chances are excellent that you never had a chance to own Nikola stock at that price.
The Worst Isn’t So Bad
As we would expect, a flood of warrant vesting occurred as the Nikola share price soared far above $11.50. The large-scale exercise of these warrants likely brought the stock price down.
Hopefully, the bulk of the warrant-vesting activity should be over by now. What retail trades are left with is a deeply discounted stock and a company that’s really not any worse than it was when then shares were close to $94.
RBC analyst, Joseph Spak, sees $20 as the worst-case scenario for Nikola stock. That would imply a 50% decline from the current share price, which isn’t even that bad for a speculative stock that’s already experienced a drawdown of two-thirds.
Besides, Spak still seems to like the SPAC (sorry, I couldn’t resist that one). He recently gave Nikola stock the equivalent of a “hold” rating along with a price target of $46.
The Bottom Line
At the end of the day, investors in electric-vehicle start-ups like Nikola will need to learn to tolerate volatility. Or, they can just buy Nikola stock, hold it for the long term, and refrain from watching the movements in the share price. Come to think of it, that might be the best strategy of all.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
