Investors Need Nikola To Define The One Thing It Does Well
Nikola (NASDAQ:NKLA) is giving investors an interesting moment. The company had, on balance, a disastrous year in 2020. NKLA stock gave investors a thrilling climb. But ultimately, the bad and the ugly outweighed any good reason to own shares of the renewables-fueled vehicle play.
The stock started this week up about 30% since the beginning of the year. Most of the gain was on the announced deal with Arizona Public Service, allowing Nikola to secure discounted pricing for electricity. The company will use this for “the accelerated development of hydrogen-based fueling solutions for the transportation industry.”
Nikola enticed investors in 2020 with ambitious plans for a hydrogen-powered truck. However at its core the company has always been about delivering cost-effective hydrogen fueling technology.
The fate of NKLA stock depends on the company succeeding in doing one or both. The 27%-plus gains of the last two days may be an indication that investors see early signs of that.
Can The Company Develop the Lock and the Key?
The reality of a hydrogen future comes down to having fuel cell electric vehicles (FCEVs) and a network of fueling stations to make them practical. For hydrogen to be both widespread and efficient there needs to be both a lock and a key. Currently, there are only about 43 hydrogen fueling stations in the United States, almost entirely in California.
However that may be changing. A new administration in Washington should provide a tailwind (and hopefully billions of dollars) to expand the development of hydrogen fueling stations. To that end, the Department of Energy (DOE) recently announced that it was providing $160 million in funding to “develop technologies for the production, transport, storage, and utilization of fossil-based hydrogen with progress toward net-zero carbon emissions.”
The industry says that there is an effort underway to expand not only in Hawaii but also across the East Coast. With this funding in place, the nation may be moving forward to a hydrogen reality. Yesterday’s Navistar International (NYSE:NAV) announcement of a collaboration with General Motors (NYSE:GM) and others to develop a hydrogen fuel-cell powered commercial truck and supporting fueling network is certainly a step in that direction.
The intriguing story of Nikola was that it was coming at the problem from both angles. In fact, the company is attempting to provide both the lock and the key. The problem is that they haven’t managed to get out of the gate strong with either.
A Lot to Overcome
By itself a failure to launch on either initiative is not a red flag. Many hydrogen companies such as Plug Power (NASDAQ:PLUG) and FuelCell Energy (NASDAQ:FCEL) limped along for years. It never really mattered where one stood on the issue of climate change, building a renewable energy infrastructure was going to take time and money. However despite the noise on both sides of the debate, the technology has been moving forward. And we seem to be reaching an inflection point.
However like Luckin Coffee (OTCMKTS:LKNCY) in China, when the negative press includes fraud allegations, Nikola now faces a problem of investor trust.
In other words, the company will be held to a higher standard for quite some time. Investors aren’t looking for home runs. But it will be looking to see if the company can generate momentum by keeping enough projects in play to prevent the bleeding in NKLA stock.
The consensus among InvestorPlace scribes is that Nikola is a risky investment. However when everybody has the same opinion (and aligns with me as well), I start looking for a ray of contrarian hope. The best I can do is to have you read this article by David Moadel that suggests if the end of 2020 was rock bottom for Nikola, there may be an opportunity for NKLA stock.
What Should You Do About NKLA Stock?
Nikola is either one of the smartest contrarian plays in history. Or it’s a penny stock that’s destined for an ominous fate. The contract in Arizona is an intriguing nod toward the former. But it’s not enough to get me hooked.
The company is slated to report earnings on Feb. 8. If you’re still inclined to dabble in NKLA stock, you should pay keen attention to what the company has to say.
But to leave you with a little hope, remember that the prospects for hydrogen are looking up. One alternative that you may want to consider is the SPDR Kensho Clean Power ETF (NYSEARCA:CNRG). The fund is sporting an impressive 12-month gain of over 200%, leaving NKLA in its dust.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.