Over the past few years, and especially the last 14 or so months, avoiding “anchoring bias” has been paramount. At the moment, Nikola (NASDAQ:NKLA) stock provides another example of the danger of that bias.
In investing, anchoring bias refers to using past prices as a market for future returns.
That can be a problem going in both directions. If a stock has gained quickly, it’s tempting to believe that the “easy money has been made” or that the stock is “due” for a pullback. Investors in recent years missed out on big growth winners that way.
If a stock has fallen, then it seems “cheap.” In the example of NKLA stock, investors paid $35 a share less than 6 months ago. Surely, then, $11.50 per share is a great deal.
But it’s important to remember that the stock market is dynamic. Prices constantly update based on new information.
That process isn’t perfect, of course. Indeed, it creates the opportunity for savvy investors to make significant returns. Still, you shouldn’t assume that the price in November was “correct.” Nor should you ignore what has occurred since then to change the market’s collective mind about a stock.
For NKLA, anchoring bias is particularly dangerous because the simplest bull case for the stock is precisely that it once traded far higher. In fact, during heady trading before its de-SPAC merger last year, what is now NKLA cleared $93.
But if you ignore that past trading, and look at where Nikola is now, even $11.50 potentially looks like too much.
What Is Nikola?
Nikola ostensibly will be a manufacturer of Class 8 trucks (colloquially known as “semis”) powered by either batteries or hydrogen fuel cells. That future drove last year’s optimism toward NKLA stock. That operating model needs to drive returns in the stock going forward.
The company is admittedly making some progress toward that goal. A facility in Germany owned by a joint venture is manufacturing “beta” battery-powered trucks. Scaled production should start next month. The FCEV (fuel cell electric vehicle) plant in Arizona is under construction.
But Nikola’s business model isn’t just about manufacturing trucks. As the controversial short seller report last year highlighted, Nikola doesn’t have a lot of intellectual property. At the end of 2020, the company had just 20 U.S. patents (though there are more applications on the way).
The plan here was for Nikola to be mostly an assembler, while creating an entire ecosystem for FCEV trucks — including hydrogen fueling station infrastructure. That plan remains significantly delayed.
Partners to fund the buildout were supposed to arrive last year. They haven’t. Nikola has reached an agreement for two stations that will underpin a route between Phoenix and Los Angeles. But that’s it.
Without that infrastructure, the Nikola model is in trouble. A big selling point was that Nikola could offer a bundled solution to semi operators. The company could therefore promise a fixed total cost of ownership.
Without fueling stations, that doesn’t work. And then Nikola is just a truck manufacturer challenging entrenched behemoths with seemingly limited competitive advantage.
NKLA Stock Going Forward
Even with Nikola’s market cap down to $4 billion, that’s not enough. And a key problem for NKLA stock is that there isn’t that much else left.
The pickup truck effort that sparked optimism last year has been canceled. A huge order for refuse trucks was announced in August and canceled in December. Nikola claimed the order would result in “unexpected costs.” It’s difficult to see why the company touted that order without understanding the costs in the first place.
That gets to another problem: credibility. I know short sellers are unpopular at the moment. But last year’s report on Nikola had truth.
Management denied as much in public in September. In February, the company then admitted to a series of inaccurate statements. It didn’t do so publicly, though. It buried the admissions in its annual report.
I’ve said before that the core problem with NKLA stock is that Nikola really is just an idea. The company doesn’t hold innovative intellectual property. It doesn’t have a particularly big lead in Class 8 EVs. Electric semis will be a big market; Nikola’s founder Trevor Milton simply saw a financially clever way to tackle that market.
Here in 2021, not all that much has changed. Nikola has made some progress, but it hasn’t made enough. That’s why NKLA stock has fallen. That’s also why EV investors still should be looking elsewhere.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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