If you pay attention to financial news programs and message boards, you might get the impression that Nikola (NASDAQ:NKLA) and electric vehicle market rival rival Tesla (NASDAQ:TSLA) are like oil and water. You might also determine that investors can’t simultaneously own Nikola stock and Tesla shares.
Prolific InvestorPlace contributor Josh Enomoto observed a highly unusual mathematical relationship between Nikola and Tesla in terms of their share prices. Enomoto’s article is definitely recommended reading, and it prompted me to wonder whether Nikola and Tesla were actually incompatible as investments.
Is the Nikola-Tesla dynamic truly a zero-sum game? In other words, do electric vehicle stock traders have to choose sides here? A closer examination may reveal a peaceful solution in the intensifying war between Nikola fans and die-hard Tesla enthusiasts.
A Closer Look at Nikola Stock
It’s been well documented that Tesla stock has shot up like a rocket since the beginning of the summer. Nikola stock, meanwhile, has declined during this time frame.
Nikola stock’s peak occurred soon after the company went public via a special purpose acquisition company or SPAC. In June, Nikola shares attained their 52-week high price of $93.99. Clearly, SPAC mania was in full effect, as was the hype over new electric vehicle companies.
Similar trajectories were seen in Electrameccanica Vehicles (NASDAQ:SOLO) and Ayro (NASDAQ:AYRO) stocks. In all likelihood, there was a spillover in enthusiasm from Tesla, which is a much bigger company than any of its competitors.
As for Nikola stock, it wasn’t destined to remain above $90 for very long. Indeed, by Aug. 28 the Nikola share price had fallen to $41.35. You could almost hear Tesla CEO Elon Musk laughing as his company’s stock diverged from Nikola’s.
An Unusual Relationship
Using math as a foundation, Enomoto deduced a rather strong inverse relationship between Tesla and Nikola stocks. In fact, he found that “the two stocks share a correlation coefficient of -63%.”
If we remove the volatile first few days after Nikola went public, the inverse relationship becomes even more evident. Thus, “when you take the correlation coefficient of the pair from June 11 onward… you yield a much stronger inverse relationship; a correlation coefficient of -78%.”
I don’t believe that Enomoto was in any way attempting to pit Nikola fans against Tesla traders. Rather, we should conclude that these two stocks were mirror-image opposites during this brief time frame. It may be tempting, then, to consider avoiding Nikola stock altogether if you’re already invested in Tesla shares.
I’ll grant that some traders might have abandoned Nikola when they saw Tesla stock shooting to the moon. Perhaps they also feared that Tesla’s Cybertruck has a “cool” factor that Nikola’s more pragmatic trucks will never have.
Patience Is the Key
Nikola doesn’t seem to want to compete with Tesla on that level. Nikola’s zero-emission trucks look pretty “cool” but are meant to be the most efficient trucks on the road, not the most stylish ones.
Thus, while Tesla and its eccentric CEO are all about flash, Nikola’s trajectory will be slower and hopefully steadier. Wedbush analyst Daniel Ives seems to concur with this idea as he considers Nikola a “story stock” that may thrive “over the next decade.”
What will that “story” look like in financial terms? Ives projects that Nikola will record revenues of $44 million during 2021’s third quarter. Then, for the fourth quarter of 2021, Ives expects Nikola to post $100 million in revenues.
Therefore, only patient investors need apply here. If you’re seeking an immediate moon shot, you can always go next door as Musk is always accepting new investors.
The Bottom Line
Enomoto’s oil-and-water analogy holds up well when we compare and contrast Nikola and Tesla stocks.
When all is said and done, it’s perfectly okay to own stakes in both companies. Just know that these are two very different investments, one being a moon shot and the other being a slow, steady ride.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.