Nikola Corp (NASDAQ:NKLA) has tread water since my article on March 26, arguing that NKLA stock was an interesting contrarian play. At the time it was at $14.10, although when I wrote the article it was at $13.40. I felt as I do now, that the stock’s bad news was mostly in the price. Today, May 19, NKLA stock is at $13.20. I think there is a greater than even chance it will be higher by this time next year.
I don’t have to go into all the issues that Nikola has experienced over the past year. Suffice it to say, as the company does, that they are cooperating with the Securities and Exchange Commission (SEC). I think most of the “bad apples,” if you will, are gone.
What Nikola Has Going for Itself
But here is what is left. It’s a company with $763 million in cash and a market capitalization of $4.77 billion (a lot higher than I expected it would be). It also has a completed truck plant in Coolidge, Arizona, (outside of Phoenix, where I live).
In addition, according to the latest Q1 earnings release from May 7, the company’s JV manufacturing plant with the German company IVECO in Ulm, Germany is completing nine battery electric vehicles (BEVs). Pretty soon, both plants will begin production on a trial basis.
That, too, is a lot further ahead than I thought the company would be at after the fiasco last year. The cash burn during Q1, given all this construction, was only $59.2 million from an operations standpoint. This can be seen in the Cash Flow Statement at the end of the Q1 report. After including $24.5 million in capital expenditure spending, the total cash burn during the quarter was just $83.7 million.
This is important since I believe the bulk of its heavy lifting construction capex spending could be over. That does not mean it won’t have negative cash flow. But much of the future cash flow burn will be associated with the production of BEVs. These can be sold, and so the cash burn can be recouped with higher sales and cash flow.
The problem is the company does not have any major customers. At least they have not announced any recently. This is almost a “build it and they will come” situation. The company will have to test its BEVs and slowly pick up orders. The move into hydrogen vehicles will also have to be slowly ramped up after it builds BEV sales and production.
What to Do With NKLA Stock
Here is the bottom line. I do not see the company running out of cash due to excessive cash burn any time soon. As a result, NKLA stock may be at an inflection point.
Moreover, once it starts picking up orders and producing EV trucks, I suspect their ability to do another cash raise is possible. The SEC issues may have to be closed, however. But there are plenty of contrarian funds out there, eager to get in on the bottom floor of a large EV play.
Some analysts tend to agree with me. For example, as of May 19, there were six analysts covering the stock according to TipRanks. Their average price target is $18.80, or 44.5% above the current price.
Yahoo! Finance says the same thing. They show that six analysts have an average price target of $18.17. Their chart shows that two analysts came out with Buy reports in April, and one Buy in March on NKLA stock.
So watch out here. Don’t be too negative. Yahoo! Finance shows that 25% of the float is already short NKLA stock. That is actually a bullish signal, since, once the stock turns around, if it does, these shorts will have to cover and buy NKLA stock.
Contrarian investors are probably already buying. If Nikola reports big orders and its first large sales, NKLA stock will be much higher.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
