Investors Are Absolutely Correct to Have Lost Faith in Nikola

The race to a carbon-free (or at least lower-carbon) future is on. Companies like Nikola Corporation (NASDAQ:NKLA) are being touted as a means by which we achieve these goals. NKLA stock may appeal to those who have exposure to other highly-leveraged plays on this secular tailwind. It’s not a great idea.

Image of NKLA logo on phone screen

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NKLA might actually be a stock that’s a growth trap right now. At least, the market seems to believe so.

Hydrogen fuel cell technology has been around for decades. Investors should take a look at Ballard Power’s (NASDAQ:BLDP) track record as a history lesson. Yes, hydrogen power is once again “in” for investors. Ballard’s stock price has done quite well in recent years, thank you very much.

However, whether hydrogen-powered vehicles can really become mainstream is another discussion. Many companies have tried to come to market and have failed or had limited success. This raises the question: what makes Nikola different?

Nikola has made a lot of great steps in developing a hydrogen-powered Class 8 semi-truck. Additionally, the company’s work on bringing to market hydrogen fueling stations is the latest catalyst investors are honing in on right now.

Nikola’s investor presentation is chock full of technological breakthroughs that could revolutionize the long-distance semi-truck market.

Of note, Nikola is attempting to do what Tesla (NASDAQ:TSLA) did in the EV sector with its fueling infrastructure. If the company can create a coast-to-coast network of refueling stations for its semi-truck market, the possibilities for the hydrogen-powered vehicle segment would certainly look a lot brighter. I mean, it’s a great idea. But right now, it’s just an idea.

Investors Need to Separate NKLA Stock From the Pack

Nikola has yet to sell a single vehicle, and its revenues approximate zero right now. Investors are buying into a very nicely-presented set of milestones. The management team would like investors to evaluate this stock based on the ability of the company to execute in hitting its milestones.

Investors willing to do so will also need to display a lot of patience with this stock, however.

Let’s be clear: Hydrogen fuel cells are electric cars. Fuel cell electric vehicles (FCEVs) provide energy via transforming hydrogen in a tank and oxygen from the air into electricity, with water as a by-product. These vehicles can charge quickly (about as quickly as one fills up a gas tank) and don’t need to be plugged in.

That said, similar to how electricity is produced, the hydrogen used as fuel isn’t completely “green.” In fact, most commercial-grade hydrogen is derived from natural gas extraction. Renewable hydrogen production is underway, but currently represents a tiny fraction of what’s produced today.

Additionally, the lack of existing fueling infrastructure for these vehicles is a significant problem for companies like Nikola. It appears the company is working on alleviating these concerns via its rollout plans for fueling stations.

However, the rate at which hydrogen-powered vehicles hit the market is likely to be markedly lower than what we’re seeing in the conventional EV segment.

Nikola’s competition is picking up its game. Companies like Hyliion (NYSE:HYLN) are in a similar stage to Nikola in terms of product development of an EV semi-truck option.

The race is on and investors seem to be getting nervous about Nikola’s ability to be the first, and the best, option for companies when the time comes to decide between EV options.

There’s room for both technologies to exist side-by-side, but investors in NKLA stock need to have a much longer-term horizon to realize gains from structural sector-specific infrastructure improvements.

Nikola’s working on this. Time will tell how successful the company will ultimately be, but right now it looks like the deck is stacked against Nikola.

Conclusion

Elon Musk’s comments that these “fool cells” are unlikely to succeed over the long-term may have been overly discursive. There are a host of investors willing to bet on the long-term success of NKLA stock right now.

That said, the market appears to be losing patience with high-growth stocks. I think if we see this rotation from growth to value continue, NKLA stock could continue to seriously under-perform in the near-term.

Indeed, this underperformance could continue into the medium- to long-term, particularly if the company’s infrastructure rollout is slower than expected.

Investors in NKLA stock seem to be gravitating elsewhere. I would suggest investors thinking about swimming against the tide avoid doing so right now.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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