Nikola (NASDAQ:NKLA) is losing money head over feet and is not worth anywhere near its present market capitalization of $8.1 billion. Based on its latest earnings report and the cash outflow seen there, NKLA stock is likely to keep falling a good deal.
For example, on Nov. 9, Nikola reported a Q3 net loss of $117.5 million, which was 36% higher than the $86.6 million net loss it had during Q2.
This was the first full quarter the company has had since it closed its merger with a SPAC named VectorIQ on June 3.
Free Cash Flow Losses and Cash Drain
Moreover, the company had significant losses in free cash flow. For the nine months ending Sept. 30, Nikola had drained out $90.8 million in free cash flow. This was an increase of $41.1 million for the quarter and represents an annualized cash outflow of $164.5 million.
Therefore, it’s a good thing that the company now has $918 million in cash and securities. This was an increase of $211 million during the quarter, which more than covered the cash outflow.
The company raised $263 million from the forced conversion of its warrants during the quarter. That is not going to happen again, so I would expect to see the cash balance start to fall next quarter with its ongoing losses and negative free cash flow.
So, for example, unless the company can get its act together and start producing revenue and free cash flow will drain the cash balance. It will fall by at least $329 million by the end of 2022 to just $589 million.
Moreover, once the company begins manufacturing operations it is likely to increase its cash drain. In addition, the cost of the buildout of its Arizona factory could drain the cash outflow further. This also does not cover the numerous lawsuits and investigations the company seems to be facing.
What Nikola Is Worth
A large number of warrants exercised their rights to buy NKLA stock during Q3. As a result, the total shares outstanding rose significantly.
For example, at the end of Q2, there were 360.9 million shares issued and outstanding. By Q3 that number rose by 6.4% to 384.08 million.
Moreover, the company claims it is still in discussions with General Motors (NYSE:GM). Originally GM was going to get a free 11% stake in the company in return for helping the company manufacture its hydrogen fuel pick-up truck, the Badger.
This implies that the absolute value of NKLA stock is worth nothing more than its net cash per share. For example, with $56.5 million in liabilities, and $985.9 million in current assets, its net-net value is $929.4 million. But since there are now 384.09 million shares outstanding, the net per-share value is just $2.42 per share.
The problem is NKLA trades for over 9x that value with an implied market value of less than $ 1 billion, compared to its present market value of $8.1 billion. So there is over $7 billion of hot air, hope, and wishful thinking in NKLA stock’s value right now.
I wonder if this is because analysts are pushing up the value of the stock.
What Analysts Say About NKLA Stock
As the Wall Street Journal pointed out in its excellent video on Nikola’s history, the company has lost significant credibility since its launch as a public company. It concluded by saying the company’s future remains “in the balance.”
Another analyst says that the company is in the business of producing press releases. It has yet to produce any kind of EV car, truck, or even suggest when it is going to be in large scale production. In its latest earnings report the company said it “made significant progress on key milestones” during the quarter.
However, TipRanks says that five analysts have produced reports in the past three months with an average target of $38.25 per share.
Yahoo! Finance has a chart on NKLA stock which shows a more negative point of view. For example, of six reports that have come out in October and November, two recommend hold, two recommend sell and two recommend buy. The most recent report which came out in November says sell outright.
The problem is there is a huge bias from analysts to only write up stocks that they like. Once they lower their internal targets on a stock, they do not follow up. As a result, don’t expect too many glowing reports.
The bottom line is that as long as free cash flow continues to drain out cash, NKLA stock is going to be worth much less than its present price.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
