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Last week, Nikola (NKLA), once valued at around $30 billion, filed for bankruptcy. The news was not unexpected, given Nikola’s cash burn and dilutive shares sales, which were just unsustainable.
Things reached a point where Nikola’s market cap fell below its quarterly cash burn. This means the company would have needed to quadruple its outstanding share count just to fund its cash-guzzling operations for a year. That was almost impossible, and as I noted previously, Nikola needed a strategic partner who could have backed the company.
That did not happen, and Nikola eventually determined that Chapter 11 bankruptcy “represents the best possible path forward under the circumstances for the Company and its stakeholders.” The company is now looking to sell its assets to a strategic or financial investor.
EV Bankruptcies
Nikola’s bankruptcy is yet another sign that the sun has set for high-flying EV startups that went public between 2020 and 2021, particularly those that opted for a special purpose acquisition company (SPAC) merger instead of the traditional IPO.
Nikola is not the first EV startup to have filed for bankruptcy from that lot. Last month, Canoo (GOEVQ) also filed for bankruptcy. The ever-growing list includes Arrival (ARVLF), Bird Global (BRDSQ), Lion Electric, Lordstown Motors, Lightning eMotors, Electric Last Mile Solutions (ELMSQ), Volta Trucks, and Proterra. This list is not exhaustive, and several other companies in the green energy ecosystem have gone out of business.
What Went Wrong with the EV Industry?
By 2021 it became quite obvious that there was a bubble in EV stocks considering the exorbitant market caps that newly listed companies were commanding. The sector’s joyride ended in 2022, when the Federal Reserve started hiking interest rates to curb inflation. This effectively pulled the plug on the supply of easy money, which was the lifeline for startup EV companies.
Higher interest rates also make vehicle ownership costly and turned away some buyers from electric cars. Moreover, the demand for EVs didn’t turn out to be as strong as expected, and even Tesla (TSLA), which once could sell as many cars as it could produce, reported a year-over-year fall in deliveries for 2024 – for the first time in history.
To make things worse, the EV market was heavily oversupplied with both startups and legacy automakers coming up with new models. This demand-supply mismatch led to a price war as companies tried to push sales by lowering vehicle prices. The price war further added to the losses of EV startups, and while legacy automakers have their hugely profitable internal combustion engine (ICE) operations to absorb these losses, startups didn’t have such luxury. With capital market conditions hardening, EV companies weren't able to raise cash by selling stock as easily as they did during their heydays.
EV Companies’ Near-Term Outlook Is Cloudy
If these troubles weren’t enough for EV companies, Donald Trump’s return to the White House adds another layer of complexity.
Trump’s energy policies are in stark contrast to his predecessor Joe Biden, who took multiple actions to spur EV adoption rates in the U.S. The near-term outlook for EV companies looks cloudy at best given uncertainty over Trump’s policies and the still-tepid demand for electric cars. The macroeconomic slowdown and fears of interest rates staying higher for longer aren’t helping the cause of the EV industry.
Which EV Companies Might Go Bankrupt Next?
To survive the current challenging market environment, EV companies need a compelling product, deep financial pockets with backing from strategic investors, and credible management teams. Most startup EV companies that have gone bust lacked in either one or all of these criteria – or worse, were built around lies and fake promises.
Looking at the current environment, I believe Rivian (RIVN) and Lucid Motors (LCID) are two names that can stick around for a much longer time as they score well on all three parameters.
However, things might start getting problematic for weaker players like Mullen (MULN) and Faraday Future (FFIE). While we cannot be certain about which EV company will go bust next, we can be reasonably sure that Nikola is not the last on that list.
