Can a stock that surged primarily on social media buzz turn into a solid company with strong fundamentals? It’s been tough for most meme companies to leverage their social media fame into lasting success. And Nikola (NASDAQ:NKLA) is facing one of the toughest turnarounds of all, making NKLA stock look quite risky.
Nikola became infamous for the actions of its founder and former executive chairman, Trevor Milton, who cut corners in an effort to turn it into a success. Most notably, during Milton’s tenure as chairman, Nikola rolled a prototype truck down a hill to make it look like it had a working engine, even though it did not have one. Nikola also made wildly unrealistic claims and projections about major parts of its business.
As a result of these issues, the shares tanked. To many, it looked as though the company would have to go out of business. But, remarkably enough, Nikola lives on.
Thanks in large part to Milton’s impressive showmanship, Nikola was able to raise a lot of cash. Consequently, the company’s new management team has plenty of funds with which to execute a comeback.
Nikola’s New Look
The new Nikola dispensed with a lot of the more extravagant parts of Milton’s vision. Now Nikola is more focused on completing basic tasks. The first goal of its new, more professional management team has been to build a state-of-the-art factory near Phoenix, Arizona.
That work is just about finished., so Nikola should be able to start producing its Tre electric trucks soon. It just signed a letter of intent in December to deliver 100 of the vehicles for example, with 10 of those deliveries slated to occur in the first half of 2022. Consequently, within a matter of months, investors should know if Nikola’s vehicles are starting to gain traction with its customers.
The Bears Are Too Focused on Nikola’s Past
A lot of bears and short sellers seem irrationally attracted to betting against NKLA stock. Since the company’s early days featured a great deal of hyperbole and many misleading claims, these skeptics seem to think that Nikola is irredeemably broken.
But a lot of publicly traded electric-vehicle companies gave investors overly ambitious timelines and revenue projections out of the gate.
Nikola is hardly the only EV company that stretched the truth in an effort to tell a compelling story. Milton’s tales were the most over-the-top, but his company was far from the only offender in the space. And, for what it’s worth, Nikola has settled the SEC’s fraud charges against it, dating back to the Milton era, for $125 million.
With that in mind, it’s worth looking at Nikola with fresh eyes. Nikola has a new state-of-the-art factory and appears to be ready to begin selling a meaningful number of trucks this year. By 2025, analysts, on average, estimate that the company will be able to generate roughly $3 billion of annual revenues. The firm’s current market capitalization, coincidentally, is now down to slightly over $3 billion.
As if that wasn’t enough, Nikola also had $587 million of cash on hand as of the end of the third quarter. On the other side of the balance sheet, Nikola has no long-term debt. Given its considerable financial resources, Nikola has time to try to make its business model successful.
The Verdict on NKLA Stock
Nikola’s stock is not really cheap. Since Nikola is a company with a lousy reputation which is only just now starting to sell actual, working vehicles, it’s understandable why investors are so nervous about it. Indeed, the company’s credibility will have to improve before a high number of investors jump back into the stock.
That said, if the rollout of the company’s Tre trucks is successful and Nikola really does start selling about $2 billion of trucks every year, the stock’s current level is going to look like a great entry point.
With a new factory and production ramping up, Nikola may just surprise its critics. And with 24% of the stock’s float sold short, its outperformance could lead to a rapid and powerful short squeeze, greatly lifting the shares in the process.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.
