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Steer Clear of Nikola Stock Despite Recent Developments

Electric vehicle stocks have surged on the results of the U.S. Presidential election. But not Nikola (NASDAQ:NKLA). And that’s no surprise.

The Nikola (NKLA) website homepage on a cell phone screen.
Source: Stephanie L Sanchez / Shutterstock.com

Sure, a victory by Joe Biden, who made EV’s a key part of his campaign, bodes well for the industry at large. But in the case of Nikola, this catalyst has taken a back seat to more pressing concerns.

With analysts digesting its recent earnings release, as well as handicapping the odds its partnership deal with General Motors (NYSE:GM) goes through, it makes sense this EV stock hasn’t soared in recent days.

So, what is the next move for Nikola? The past few months have shown this company is far from becoming the next Tesla (NASDAQ:TSLA). But, while that means there isn’t much of a bull case right now, going short may not be best call, either.

Why? Just a morsel of positive news could be enough to cause a short-squeeze, which would send shares temporarily higher. In short, with going long (or short) not worth the risk, it’s best to sit out on this EV play for now. Its material issues remain unresolved.

Uncertainty Continues for NKLA Stock

As InvestorPlace’s Ian Bezek wrote Nov. 10, it’s questionable whether the recent election results improve the company’s prospects.

Sure, massive federal support for the shift to EVs is a potential tailwind. But right now, Nikola has more important factors at play than the potential benefits from “green new deal-like” policies. Namely, the issue is whether the company is making material progress towards bringing its prospective vehicles (its EV semi-trucks, along with the Badger EV pickup) to market.

Regarding this factor, the jury’s still out. As Deutsche Bank put it in a recent investor note, the recent third-quarter results were “uneventful.” Much of this has to do with the continued uncertainty around its still-pending partnership deal with GM.

Speaking of which, what’s the latest on this potential game-changer? The fact the company didn’t provide an update on where the deal stands now isn’t a good sign. Yet, the deal isn’t officially off the table yet.

The continued uncertainty makes going long Nikola at today’s prices questionable. But, that doesn’t mean going short is the way to go either. Just like with going long, the risk isn’t worth the potential profits.

Don’t Bet Against NKLA At Today’s Prices

With the company still floundering, continuing to bet against it seems like a smart move at first glance. But, while a $7 billion market capitalization for a company with zero revenue looks absurd and overvalued, it won’t take much to fuel an epic bounce back in this stock. Keep in mind that it has fallen more than 78% since hitting all-time highs in early June.

As of the end of October, about 29% of the stock’s outstanding float had been sold short. With the short side being a crowded trade, just a breadcrumb of good news may be enough to fuel a short-squeeze. News that the GM deal is getting done would be such a catalyst.

We may see a change in the deal’s terms. For example, the legacy automaker may wind up with a larger equity stake in this EV upstart. But the details won’t matter as much as the headlines.

Simply put, good news is very bad news for those who short Nikola.

However, while this outcome is possible, it’s hardly a reason to go long NKLA at today’s prices (around $20 per share). Although progress on the GM deal could send shares into hyperdrive once again, the opposite will happen if the deal comes to an end.

Nikola claims it doesn’t need this partnership deal in order to survive. But if bad news hits the street, it’ll be the headline, not the details, that will matter. And that would mean bad news for Nikola.

Sit Out on Nikola … For Now

Failing to secure a deal with GM won’t put this EV company out of business. Even with around $45 million per quarter in cash burn, the company is well capitalized, with over $900 million in its coffers.

Yet, going long now leaves you exposed to tremendous potential losses if the deal doesn’t go through. On the other hand, going short while shares trade for $20 per share isn’t the best move, either. The short-squeeze risk outweighs any potential profits from the stock falling to single-digits.

So, with too much risk on the long and short side, what’s the play? With political changes not making much of an impact, and great uncertainty over its prospective GM deal, the best move with Nikola shares right now is to stay on the sidelines.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/steer-clear-of-nikola-nkla-stock-despite-recent-developments-cseo/.

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