The Nikola (NKLA) stock story is only getting worse, with shares recently falling to record lows. The company’s market capitalization is now just about $97 million, a far cry from the over $30 billion market cap it commanded at its peak in mid-2020. In those days, Nikola was valued higher than Ford (F). We now know this was a sign of an impending bubble burst in the green energy space.
Cut to 2024, and most high-flying green energy stocks have either gone out of business or are in free fall. Things might get even tougher for these companies with Donald Trump set to return to the White House next year. The president-elect has vowed to end the “EV mandate” – policies designed to disincentivize driving gas-powered cars – on the very first day of his presidency.
Nikola Has First-Mover Advantage in Hydrogen Trucks
Nikola is a play on the expected growth in the hydrogen economy. Carriers have been looking to transition to green vehicles, and hydrogen fuel cell electric vehicle trucks stand out over battery electric vehicles due to their higher range and low refueling time.
Nikola has the first-mover advantage as the only original equipment manufacturer (OEM) with Class 8 hydrogen trucks commercially available in North America. The company also sells battery electric trucks and has the option to switch between the two depending on the demand environment.
Nikola has been partnering with national carriers and has expanded its dealer base to increase the adoption of its vehicles. The company has also lowered its cash burn rate and is a much more streamlined company than it was in 2020. It has also started realizing revenues from sales of regulatory credits that almost entirely flow to the bottom line. Nikola is now scaling up production and expects to deliver between 300-350 fuel cell trucks in 2024.
Why a Trump Presidency Could Be Tough for NKLA Stock
The regulatory environment was quite favorable for Nikola under President Joe Biden. The Inflation Reduction Act of 2022 and the EPA Clean Ports Program have been enablers of its business.
However, Trump is not expected to maintain these green energy policies, creating a great deal of uncertainty. Also, Nikola is still burning through a lot of cash. The cash burn has been funded by stock and convertible bond issuances which have increased Nikola’s outstanding share count.
The company seems to be in the business of selling its own shares, rather than trucks. Nikola has raised capital in multiple tranches over the last three years, making it difficult to keep count. Earlier this week it filed to raise another $100 million by issuing new shares. What’s really concerning here is that subsequent capital raises have led to massive dilution and the most recent capital raise effectively means that Nikola would double its already bloated outstanding share count.
Nikola Might Need a Strategic Partner to Survive
During the third quarter earnings call, Nikola’s CFO Tom Okray said “our flywheel-based business plan remains unchanged, building scale to enable us and our supplier partners to improve and optimize the unit economics.” He added “In some cases, we are more forgiving on [average selling prices]” – which basically means that the company is willing to sacrifice margins for volumes.
Incidentally, Tesla (TSLA) also made it clear that it would prioritize shipments over near-term margins and has cut prices to spur sales. However, Nikola does not have the luxury of Tesla, which is not only free cash flow positive, but has plenty of cash sitting on its balance sheet to fund its growth.
Overall, Nikola's management finds itself between a rock and a hard place, and while scaling up is the only viable option if the company wants to succeed, it comes with massive cash burn in the near term.
In my view, Nikola might need to onboard a strategic partner that can invest in its business and help it to scale production. To be sure, we have multiple such examples where legacy automakers have backed startup green energy companies. For instance, Volkswagen (VWAGY) has partnered with Rivian (RIVN) in the U.S. and Xpeng Motors (XPEV) in China as the German auto giant has been looking for promising EV startups for collaboration. It is also an investor in solid-state battery startup QuantumScape (QS).
As for Nikola, it has a tainted past and General Motors (GM) backed out from investing in the company after Hindenburg Research accused the startup and its founder Trevor Milton of fraud. While Nikola has since disassociated itself from Milton, who was sentenced to four years in prison last year, it remains to be seen if any other automaker backs the company now. In the absence of a strategic partner, Nikola might find it tough to survive, given its weak balance sheet and continued cash burn.
