What gives with Nikola (NASDAQ:NKLA)? Major electric vehicle names like Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) remain in bubble mode, with their shares at or above all-time highs. But Nikola stock? It’s been left out of the fun. Granted, shares have moved up 20% in the past month. Yet, they remain more than 56% below prior highs.
Chalk it up to dilution, a rich valuation (even by EV stock standards), and track record of promises, but very few tangible results. Until this company proves itself to be a formidable competitor, shares should trade a much lower valuation. But instead, shares trade as if its ambitious goals will be achieved with minimal hiccups.
Put it all together, and there’s little compelling reason to buy shares today. If the stock is floundering in boom times, what’s going to happen once enthusiasm for all things EV does a 180? With this question in mind, shares remain a sell.
EV Bubble Supports Today’s Valuation of Nikola Stock
As I wrote previously, there are many reasons why shares in this once hot stock could continue to head lower. With so much about this company still hypothetical rather than tangible, it’s tough to be bullish on the company’s potential future performance.
Yet, some have taken a more balanced view on Nikola’s prospects. Wedbush’s Dan Ives (well-known for his coverage of Tesla) recently initiated coverage of this EV stock. The analyst gave shares the equivalent of a “hold” rating, and a price target of $45 per share.
His rationale? While Ives believes it can become “a major horse in the EV race,” he is concerned about the stock’s current valuation.
That’s no surprise. As our Mark Hake wrote on Aug 25, even if you assume all the reservations for its prospective Badger truck turn into sales, shares are overvalued at today’s prices. Trading for what he estimates is six times “potentially binding sales,” I agree that’s too rich of a multiple for a future that’s yet to be written.
However, while these concerns have likely prevented shares from bouncing back again, the EV bubble may still be at play here. In other words, shares haven’t fallen further thanks to the remaining enthusiasm for this sector.
But, what happens if and when the EV bubble bursts? Without a track record of tangible results, this stock has very little to fall back on if the tide starts to turn.
Shares Could Tumble if Enthusiasm Cools
Right now, electric vehicle stocks seem invincible. But, the exuberance can’t go on forever. Sure, this is a megatrend in motion. There could be a true paradigm shift, where the automotive space goes from being internal combustion engine-based to fully electric and/or hydrogen powered.
But, in the meantime, a correction is more than due. And while this stock has already taken a tumble, don’t expect it to stay in place if its high-flying peers start to trend lower. How so? Namely, Tesla and Nio have much more underlying strength to fall back on. Nikola? Not so much.
Compared to its two peers, Nikola is mostly sizzle, with very little steak. While those two EV companies have delivered on many of their respective promises, this company has yet to prove itself. Forget about the company’s ambitious plans to build a nationwide network of hydrogen fueling stations, this company has yet to deliver a single vehicle!
Given this factor, how far could shares fall? Back to where they were before EV pandemonium sent the stock into hyperdrive. In other words, prices far below $20 per share (shares trade around $40 per share today).
In short, there’s not a good risk/return proposition with Nikola stock. Given little that could move the needle near-term, upside potential is questionable. But, for a stock in a sector in the midst of bubble, things reverse on a dime. And while a lowering tide will lower all boats, this less-established EV play could capsize.
With No Rebound in Sight, Steer Clear for Now
If this stock is floundering while its industry is in a bubble, what’s going to happen when the said bubble bursts? If interest cools across-the-board for EV, even leaders like Tesla are going to take a hit. Shares in this company stand little chance of retaining their current valuation. Even as the stock has more than halved from its highs.
So, what’s the play here? With more downside risk than upside opportunity, Nikola stock remains a sell for now. Even if shares pull back some more.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.
