Nikola (NASDAQ: NKLA), a maker of electric semi-trucks, went public by merging with a special purpose acquisition company (SPAC) in June 2020. Its shares opened at $37.55 and more than doubled to an all-time high of $79.73 a week later. But today, Nikola's stock trades at less than $1.
Nikola's investors fled as it broadly missed its own production estimates, its founder and former CEO, Trevor Milton, was convicted of securities and wire fraud in 2022, and it recalled nearly all of its vehicles in 2023. That same year, Nikola doubled its own share count to raise fresh cash through secondary share offerings and switched to its fourth CEO in as many years.
All of those problems are bright red flags, but could Nikola be a turnaround play for contrarian investors? Let's discuss the top reasons to sell, buy, or hold this volatile electric vehicle (EV) stock.
Image source: Nikola.
The reasons to sell Nikola
Nikola initially set some ambitious production targets for its battery-powered electric trucks (BEVs) and hydrogen-powered fuel cell electric trucks (FCEVs). In its pre-merger presentation, it told investors it could deliver 600 BEVs in 2021, 1,200 BEVs in 2022, and 3,500 BEVs in 2023. It also planned to deliver 2,000 FCEVs in 2023.
Unfortunately, Nikola didn't deliver any vehicles in 2021 and only delivered 131 BEVs in 2022. Like many other smaller EV makers, Nikola blamed its sluggish production rates on supply chain constraints and other macro headwinds. In 2023, it only delivered 79 BEVs (due to the recall of most of its BEVs after a series of fires) and 35 FCEVs.
In its original presentation, Nikola said it could generate $1.41 billion in revenue in 2023 with a negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $66 million. But in reality, it only generated $36 million in revenue in 2023 with a negative adjusted EBITDA of $519 million.
That's a grim situation for a company that ended the year with just $465 million in unrestricted cash. Nikola might try to raise more cash by diluting its own shares again, but it's already increased its share count by 239% over the past three years. Even if Nikola launches another secondary offering, it might have to sell its shares at a steep discount to the market price -- as it did last March -- to attract any buyers.
To make matters worse, Nikola's shares could be delisted if they stay below $1 for too long. It's trying to avoid that fate with a reverse stock split, but that's a desperate proposal that won't inspire much confidence in its future.
Lastly, Nikola is already losing its early-mover advantage in the electric semi-truck market. Tesla(NASDAQ: TSLA) and Daimler Truck(OTC: DTRU.Y) both started to deliver their first electric semi-trucks in 2022, and it could be incredibly difficult for Nikola to keep pace with those larger and more profitable automakers.
The reasons to buy or hold Nikola
On the bright side, Nikola expects its growth to accelerate again in 2024. During its most recent conference call in February, CEO Steve Girsky predicted the company would generate $150 million to $170 million in total truck revenue for the full year. With an enterprise value of $700 million, Nikola trades at 4 times the midpoint of that forecast. That makes it cheaper than Tesla, which trades at 5 times this year's sales.
Girsky also expects Nikola's gross margin to improve from negative 597% in 2023 to between negative 80% and negative 100% in 2024 as it raises its prices and reduces its production costs, and for its operating expenses to decline from $436 million in 2023 to between $280 million and $300 million in 2024. Girsky believes Nikola can accomplish those goals even as it expands its hydrogen charging network with its partner Voltera. It aims to open 14 of those stations by the end of 2024 to support its own FCEVs.
Investors should take those optimistic estimates with a grain of salt, but they suggest that 2024 could be a transformational year for Nikola as it finally gets it act together. As for its liquidity, its manageable debt-to-equity ratio of 0.8 (which was reduced by nearly doubling its share count over the past year) still gives it some room to issue fresh debt offerings.
So is it time to buy, hold, or sell Nikola?
Nikola is making some bold promises again, but I'd personally need to see a few green shoots before I buy the stock. So for now, I still think it's smarter to sell Nikola than to buy or hold it as a Hail Mary turnaround play.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
