Nikola (NASDAQ:NKLA) made headlines in early June when the next-generation truck maker — often dubbed the Tesla (NASDAQ:TSLA) of trucks — debuted on Wall Street following a reverse merger with special purpose acquisition company VectoIQ. Within days, Nikola stock took off like a rocket ship. It went from $30 to $90 in less than a week, as investors rushed to get a piece of this company that everyone was calling the next Tesla.
That “next Tesla” hype has since faded, as has Wall Street’s enthusiasm for the shares. Since mid-June, the stock has essentially given back all of its gains.
Today the stock trades below $40.
But Warren Buffet’s signature saying — be greedy when others are fearful — rings true in this case.
In other words, it’s time to buy the stock on weakness.
Here’s why.
Nikola Is a Strong Company With a Bright Future
Nikola is a next-generation commercial truck maker which has the potential to be the Tesla of the truck industry one day.
Long story short, the electrification of transportation won’t stop with passenger cars. It will extend into commercial trucks, too. And that’s where Nikola is positioning itself to be a big winner as the mass electrification wave sweeps across the transportation sector over the next decade.
The company has created two market-leading, zero-emission commercial truck prototypes: a battery electric vehicle (BEV) truck and a hydrogen fuel cell (HFC) truck.
Both trucks have wide-ranging benefits over traditional diesel commercial trucks.
They will be cheaper, with all-in costs of about 95 cents per mile (and falling), versus 97 cents per mile for diesel trucks. Their costs will be more certain, with limited reliance on volatile fuel prices. Not to mention, they will be clean, while diesel trucks account for 39% of the transportation sector’s greenhouse gas emissions.
Nikola’s trucks will also be modern (one look at the average diesel truck shows that those trucks are far from modern) and built on a software system that can seamlessly integrate autonomous technology.
In other words, Nikola’s trucks are light years better than what’s currently out there. They are trucks designed for the 2020s.
As a result, strong demand for these next-gen trucks are inevitable. Indeed, Nikola’s FCEV truck has racked up over 14,000 pre-orders totaling more than $10 billion from the world’s biggest trucking and fleet companies.
That’s just the tip of the iceberg. In North America, 400,000 commercial trucks are sold every year.
Over the next decade, Nikola will leverage its pioneering technology platform to increase adoption of its next-generation, zero-emission trucks in that huge market. As a result, its revenue and profits will soar.
Nikola Stock Is Now Undervalued
The problem with NKLA stock when it was soaring to $90 is that it already priced in huge growth for several years.
With the shares below $40, that isn’t the case. Instead, Nikola stock is undervalued now.
As I stated earlier, about 400,000 commercial trucks are sold every year in North America. By 2030, a majority of the trucks ordered will be zero-emission vehicles, as companies look to cut costs, control expenses and hit environmental sustainability targets.
In that market, Nikola is likely to be a leader, given its top-notch technology platform, strong management team, deep-pocketed investors and the fact that it will sell both electric trucks for short-haul transportation and hydrogen trucks for long-haul transportation.
The company is targeting about 12,000 truck deliveries in 2024. I think that number can reasonably grow to 60,000 deliveries by 2030, representing about 15% of the North American addressable market.
If that’s the case, I think Nikola’s sales can reach almost $20 billion by 2030. That will include its revenue from commercial truck sales, service and maintenance, and hydrogen-charging stations. Importantly, this figure does not include any revenue from Badger, the company’s zero-emission pick-up truck for consumers.
Given profit margins on each truck of about 30%, Nikola is targeting eventual EBITDA margins of about 25%. Assuming the company can get to those profitability levels by 2030, I estimate that Nikola is on track to generate earnings per share of about $6.50 in 2030.
Based on a market-average 17-times forward earnings multiple, that results in a 2029 price target for NKLA stock of about $110. After discounting 10% per year, I arrive at a 2020 price target for the stock of $45+.
Today’s Headwinds Will Pass
Under $40, Nikola stock is undervalued.
But does that mean that the shares will bounce back any time soon?
Yes. Mostly because today’s challenges will pass and when they do, improving investor sentiment and a favorable valuation will spark a nice rebound rally by the stock.
The shares have been hit by a series of bearish calls by Wall Street analysts in recent weeks. But all of those bearish calls were based on the shares’ valuation. That is, all of the notes read something like, “Nikola is a great company, but Nikola stock is overvalued.”
However, those notes came out when the stock was above $60. Now the shares are below $40. And the average price target on Wall Street is $56, with the lowest price target of $45 still above the price at which Nikola is trading today.
In other words, over the next few weeks, I believe that most of those firms which released bearish ratings on NKLA stock in June or July will reverse their opinion and upgrade the stock now that its valuation is more favorable.
This rush of upgrades will help improve investors’ sentiment towards Nikola. Improving investor sentiment plus a discounted valuation will be a winning formula for the shares.
The Bottom Line on Nikola Stock
Nikola is a long-term winner. Wall Street just got too excited about its stock in June.
Its shares have been normalizing lower ever since. But this normalization is now overdone. Below $40, the stock is substantially undervalued relative to the truck maker’s long-term growth prospects.
As a consequence, there will be a series of “valuation upgrades” from Wall Street analysts over the next few weeks. As that happens, the current selloff of the stock will reverse course, causing the shares to climb towards $50.
So buy the stock today before that big rally materializes.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.