Nikola (NKLA) stock price has continued to underperform the market this year as investors worry about its future and dilution risks. It has slipped by over 64% this year and by 88% in the past 12 months. A $100,000 investment in the company at its highest point in 2023 would now be less than $9,000.
The opportunity
Electric, hydrogen, and electric vertical take-off and landing (eVTOL) or flying car companies have a great ambition and are working to solve a real challenge.
eVTOL companies like Joby Aviation and Archer Aviation want to solve the urban traffic crisis while hydrogen and electric vehicles are hoping to decarbonise the world.
The challenge for firms like Nikola, Lilium, Joby, and Rivian is that coming up with a new product and achieving success with it is highly costly. The situation is more complex when you are building a new product from scratch.
Altogether, in the past decade, companies in the EV industry have burnt through billions of dollars. A closer look shows that only Tesla has spent these billions and made consistent profits.
Companies like Rivian and Lucid that started their vehicle manufacturing and deliveries are yet to make a profit. They are all losing a fortune scaling their businesses. Rivian’s total net loss in the past four financial years totaled over $17 billion while Lucid has lost over $7 billion in the same period.
Nikola’s key challenges
Nikola Motors is in a more difficult place than these other companies because it is building hydrogen trucks, which has no supportive infrastructure behind it. For electric vehicles, it is easier to install a charger at home and many gas stations have started to incorporate these solutions.
Nikola is working to solve the infrastructure challenges using its HYLA product, which provides modular gas stations. Scaling this solution throughout the United States will be tough and expensive.
Nikola’s trucks are also more expensive than diesel ones. As such, while trucking companies want to decarbonise, they will only do so when it makes sense for them financially. Besides, trucking is a low-margin business and each dollar counts. XPO Logistics has a net profit margin of 3% while J.B. Hunt has 4.90%.
Nikola has received many orders for its trucks. In June, it noted that Walmart Canada had become a customer. It has also delivered over 40 trucks this year. I believe that these are test purchases as companies assess their advantages vis-a-vis their diesel trucks.
Cash burn and losses
The other big challenge for Nikola stock is that the company is a top cash incinerator that loses millions of dollars each quarter. Its net loss came in at $147 million in the first quarter, an improvement from the $169 million it lost in the previous quarter. It has lost over $900 million in the last five quarters.
Nikola’s path to profitability will be a longer one, as we have seen with other companies in the EV and renewable energy industry.
This path would be clearer if Nikola had a solid balance sheet, which it lacks. It ended the first quarter with $345 million in cash and equivalents, down from $464 million in the same period in 2023. It also had $1.2 million in restricted cash and $23 million in accounts receivables.
Therefore, for a company losing over $100 million in a quarter, having $469 million in current assets is not enough. This means that Nikola will need to raise cash to boost its balance sheet soon.
Nikola has a long history of diluting its shareholders. In March last year, it announced a $100 million stock offering. Nikola also raised cash through a combination of equity and convertible debt.
Nikola’s key challenge is that the previous capital raises happened when the company had a market cap of over $1 billion. Today, it sits at $440 million, meaning that the window for these equity raises is narrow.
Looking ahead, the next important catalyst for the Nikola stock price will be its earnings, which are scheduled on August 9th. Analysts expect the results to show that its revenue rose by 47% in Q2 to $22.7 million. For the year, they expect that its revenue will reach $116 million in 2024.
Nikola stock price forecast
NKLA stock chart: TradingView
The daily chart shows that the NKLA share price has been in a strong downtrend for a long time. It has remained below the 50-day and 100-day Exponential Moving Averages (EMA), meaning that bears are in control.
The stock has formed a falling wedge chart pattern, which is nearing its confluence level. In most cases, this is one of the most bullish chart patterns.
Therefore, the outlook for Nikola stock is mostly bearish, with the next point to watch being at $7.52. However, because of the wedge pattern, the stock could experience a short squeeze after its earnings. If this happens, it will likely rise to $12.
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