With One Scandal Behind It, Nikola Needs to Give Investors Something to Believe In
The outlook for Nikola (NASDAQ:NKLA) was looking grim at the start of 2021. That changed in mid-January when NKLA stock got a short-lived bounce as one of the “meme” stocks. However since soaring to a closing price of $28.58 in late January, the stock is down approximately 35%.
It could be worse. And many analysts may be of the mindset that it should be worse. After all, in the company’s annual filing with the Securities & Exchange Commission (SEC) it confirmed what was largely expected. Founder and chairman Trevor Milton made a series of inaccurate and/or false statements over a period of four years.
This would be in line with, although perhaps not completely support, the Hindenburg Research report that accused Milton and Nikola of fraud.
However investors seem determined to find a floor for NKLA stock. But before that can happen, Nikola needs to give the trading community more than just less bad news.
Putting It Behind Them
Regarding Nikola’s admissions, I have a slightly different view than my colleague, Chris Lau. I agree with Lau’s overall take on Nikola. However in his opening he stated that investors were accepting Nikola’s fraud. However, it could be that investors gave NKLA stock a bump to acknowledge that the company can now put the issue behind it.
I find that in most cases the known is always better than the unknown. The unknown just creates a whirlwind of rumors and possibilities. The known (and hopefully the truth) cuts through all of that. Nikola has done a bit more than give a “mistakes were made” defense. And that should put the matter to rest. Milton is no longer with the company. Now investors can figure out what a fair value for Nikola stock really is.
Unfortunately, that’s not going to be easy. NKLA stock is still heavily shorted, although short interest is down significantly from where it was in mid-January. I would suspect that Nikola will become less attractive as a target of short sellers with the scandal in the background.
No News Is Not Good News
This means however that, in the absence of bad news, there should be some good news to drive higher volume. Nikola is still a “pre-revenue” stock. And without revenue, the renewable energy tailwind supplied by the Biden administration will wear out sooner rather than later. There is simply too much competition in this space.
It might be different if Nikola was playing in the electric vehicle space. But the company’s focus is on hydrogen. Specifically, the country is trying to come at the issue of hydrogen fuel from two sides. As I wrote in January, “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.”
Clean Does Not Always Mean Green
One significant challenge that Nikola faces is that they are committing capital to producing green hydrogen. This means hydrogen produced with a feedstock that is not carbon based (i.e. grey hydrogen). Currently most hydrogen uses natural gas as its feedstock.
And at least one industry analyst, Fabio Ranghino, of the asset management firm Ambienta, says that production costs of green hydrogen have to “drop by 70% to 80% from current levels” to be cost competitive with grey hydrogen. This mean viability could be years away.
And as Lau also pointed out, Nikola still plans to produce its version of an electric truck powered by a hydrogen fuel cell. So that’s another project consuming cash of which Nikola has precious little to burn.
NKLA Stock Is For True Believers Only
When Nikola stock had its meteoric rise there was always a sense that it seemed too good to be true. Now we know why. But that does have the benefit of allowing those that are so inclined to decide for themselves if Nikola has realistic prospects.
I think it may, but not anytime soon. Green hydrogen may bet a boost from any Biden administration clean energy plan. But there are many renewable projects competing what are likely to be even more limited dollars than previously thought.
It’s more than likely that Nikola will have to build its future without immediate help from the federal government. And that is a much more speculative path for a company that has nothing generating revenue. It points to future rounds of share offerings and future dilutions. Until the company can prove that thesis wrong, it’s best to avoid NKLA stock.
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.