I have been deeply critical of Nikola (NASDAQ:NKLA) in my articles several months before the damning Hindenburg Research report came out in mid-Sept. 2020. That was when NKLA stock was in the mid-$50’s and I said it was overvalued.
I have consistently maintained this stance, even in my most recent article on Nov. 17, when the stock was at $22.03. Today, it’s a little more than $16, and I see no reason to change my mind.
In fact, if anything I should lower my target price of $2.42, which in my Nov. article I said was the “net-net” value of the company. The “net-net” value is the amount of cash after deducting all interest-bearing liabilities.
This implies that NKLA stock has much much further to fall. In fact, when Nikola releases its Q4 losses and share count the net-net number will likely be even lower. This is probably going to happen before the end of January.
One thing is for certain. Almost every major deal the company announced when Trevor Martin was the CEO has gone up in smoke. In fact, I am not even sure the company’s net plant outside of Phoenix, which it is constructing, will have a lot of customers. That remains to be seen.
A Hard Time Ahead for Nikola
Frankly, the company’s management is going to have some hard questions to answer during the next upcoming conference call. Here are some of them.
- Can the company name any major corporations which have signed up for deliveries of its hybrid semis or hydrogen trucks on a non-binding basis?
- What was the major reason the company scuttled the Badger pickup truck?
- What is the exact estimated cost now of the Phoenix plant, and how much cash will that leave the company?
- Will Nikola need to raise further capital, either debt or equity, before it can achieve EBITDA profitability?
There could be further questions based on the exact revelations that Nikola makes in both its prepared remarks and its 10-Q.
Here is the bottom line. I highly suspect that the estimated net-net value of NKLA stock will be well below $2.00 per share once it discloses how much the Phoenix plant will cost.
What to Do With NKLA Stock
A lot of people on Wall Street’s sell-side have egg on their face with Nikola. They are trying to manage this to save face by slowly lowering their price targets.
Today, TipRanks says that 8 analysts have an average target price of $27.86, or “a 73.26% increase from its last price of $16.08.”
So, in the guise of seeming to show that Nikola is a worthwhile investment, they lowered the target price en masse by $10.39, or 27.1%. And that was in the space of just one month or so.
I foresee this kind of activity by the sell side continuing over the next several quarters as it becomes clearer that the company is starting to run out of money.
And that brings up the most important point about Nikola’s future. Who in the world is going to trust the company to give it more equity? In all likelihood, they are going to have to raise debt or convertible debt, based on whatever collateral can be mustered.
Right now there are no reasonable projections of when breakeven will occur. Therefore the company is going to burn through its cash and likely take on debt. This will make the net-net number fall even further.
Therefore, you can see that NKLA stock is going to get stuck in some sort of death spiral. They need a major client, a new development, or a master deal to break it out of this cycle. Good luck with that.
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.