As broader markets soared to “record highs” in the first half of 2024, startup green energy companies found themselves in a starkly different trajectory, plummeting to fresh lows. Among these, Nikola (NKLA) stands out, a glaring example that may feature in any future retrospective on the electric vehicle (EV) bubble.
Nikola, an early player in the green energy space riding the special purpose acquisition company (SPAC) frenzy of 2020, epitomized the renewable energy exuberance akin to GameStop (GME) in the meme stock mania.
When Nikola’s market cap briefly eclipsed that of Ford Motor (F) in 2020 without even commencing vehicle deliveries, it served as an ominous sign of an impending bubble in the EV sector.
Since its peak, Nikola’s stock has spiraled downward, currently sporting a market cap below $350 million. The company is gearing up to unveil its Q2 earnings report come Friday. Let’s delve into market expectations for the upcoming report and assess the viability of NKLA stock.
Nikola Q2 Earnings Preview
Analysts anticipate Nikola to announce revenues of $24.6 million for the June quarter, marking a 60.5% surge from the same period last year. The company managed to sell 72 Class 8 Nikola hydrogen fuel cell trucks to wholesale customers in Q2, surpassing its guidance.
Market consensus projects a net loss of $120.6 million in Q2 for Nikola, signifying a 13.4% year-over-year increase. It’s no novelty for fledgling green energy firms to report substantial losses and cash outflows, prompting frequent capital raises – a path Nikola has trodden quite frequently.
Nikola has been aggressively issuing shares, leading to a noticeable uptick in its outstanding share count. Consequently, if Nikola eventually turns profitable, these earnings would have to be distributed among a significantly larger share count, thereby diluting the per-share earnings.
NKLA Is Looking to Spur Volumes
For Nikola’s management, prioritizing profitability isn’t the top agenda item currently. Struggling for survival, the team executed a reverse stock split in June to meet exchange listing prerequisites. Management conveys a willingness to sacrifice pricing to stimulate initial sales volumes.
During Nikola’s Q1 2024 earnings call, CFO Tom Okray stressed the necessity of scale for profitability. Nikola faces challenges unlike Tesla (TSLA), which, with robust margins, can prioritize volumes over margins. In contrast, Nikola’s persistent losses and fragile financial position leave it with little room to maneuver.
NKLA Stock Forecast
While Nikola garners coverage from only 5 analysts, with just 1 rating it as a “Strong Buy,” the majority label it a “Hold.” Nonetheless, the mean target price of $18.01 offers a glimmer of hope, standing over 145% above Wednesday’s closing rates.
Nikola has overhauled its business strategy, directing efforts toward commercializing its hydrogen fuel truck and establishing hydrogen infrastructure in North America under the Hyla brand, potentially for future monetization if the hydrogen sector gains traction. With a pioneering position in green Class 8 trucks in North America, Nikola holds promise for substantial growth if it manages to push its trucks at scale.
Key Risks Nikola Investors Should Watch Out For
However, multiple risks loom for Nikola investors, with execution topping the list. Successfully selling its hydrogen fuel trucks, a technology that faces skepticism from figures like Elon Musk, presents a formidable challenge.
A potentially unfavorable outcome for Nikola could stem from a victory by Donald Trump in the upcoming election, given his energy policies favoring the fossil fuel industry over green energy. Nonetheless, the trajectory towards cleaner energy persists irrespective of White House occupants, with policy shifts influencing the pace of the transition.
Moreover, Nikola’s weak balance sheet and recurring cash burn pose significant risks, raising the specter of insolvency. Finally, amid recent market volatility, financially frail companies like Nikola might find it arduous to attract investor favor, especially when premium quality shares are available at bargain prices.
Altogether, although Nikola may seem reasonably priced with a next 12-month price-to-sales multiple of 1.66x, prudence suggests treading cautiously around the beleaguered company, even as the risk-reward equation appears enticing for investors inclined towards high risk.