Despite the market accepting that Nikola (NASDAQ:NKLA) is outright fraudulent, investors are not abandoning their investment yet. Strong investor demand for electric vehicle stocks is lifting NKLA stock.
Traders do not mind betting on NKLA. Since its share collapse ended in October 2020 on heavy volume, the stock spiked sharply higher on at least two occasions.
The short-term trade is enough to keep speculators. The heightened buying interest is at risk of coming to an end.
General Motors (NYSE:GM) is eyeing its own new hydrogen truck project. It is teaming up with Navistar to make this truck. If successful, the vehicle will have over 500 miles of range.
Previously, GM had plans to hold an equity stake in Nikola. The new tie-up with another company all but ends its fairytale romance plans with Nikola. GM’s ambitious timeline for a new fuel cell vehicle by 2024 is bad news for NKLA stock. The company has plenty of cash on hand but is a pre-revenue operation.
Nikola teased its prototype of the all-electric Nikola Tre. It shipped 14 units from Ulm, Germany to the U.S. on Dec. 15, 2020. On Feb. 6, Nikola announced that IVECO and FPT Industrial will manufacture the Nikola Tre. CNH took a $250 million stake in Nikola and will act as the lead Series D investor.
Trouble Ahead and Behind for NKLA Stock
The Tre BEV development and $600 million plant will pressure Nikola’s cash on hand. As capital expenditures increase, Nikola will start running out of money. It may sell debt or sell shares to refill its cash levels.
Given the market’s euphoria over EVs and clean energy, Nikola may have no trouble selling shares, but the stock is already on fragile ground. Expect a sharp dip in 3-6 months if it sells more shares.
Wall Street has a different, more bullish view. The analysts have an average price target of $29.29 price, according to tipranks. This value is based on eight analysts.
Investors must get past the notion that Nikola is a scam before investing. The former Chief Executive Officer, Trevor Milton, resigned after fraud accusations. The CEO did not stay on board to fight the allegations, he quit all social media and disappeared. Investors should quit on Nikola stock, too.
Higher capex spending needs will give Nikola a reason to seek more capital from the stock markets. In the last three months, insider sales topped 2.74 million shares. Insiders bought less than a million shares in that period.
Optimistic investors may assume that Nikola’s vehicle developments will bear fruit. Yet the capex requirements rise almost exponentially. Development and pre-production costs are small.
Selling vehicles in volume (after successful performance testing) will add to costs. Nikola spent $600 million on the Arizona factory alone. Building a hydrogen network and adding sales and service to them will cost money, too.
Iveco and FPT’s investments in Nikola bought a lifeline for the ailing firm for now, but if the project does not lead to a Nikola Tre ready for market, these two firms will lose plenty of money.
Your Takeaway
Investors should continue avoiding Nikola. The company rode on the EV and hydrogen fuel hype for the last year, but reality is setting in. Big firms with a bigger budget and years of experience in the auto industry will survive. GM is one of them. Nikola offered compelling designs and nothing beyond that. When markets eventually sell-off, Nikola stock will fall with it.
Investors insistent on Nikola’s prospects should treat the stock as speculation. If shares pop, lock in profits. If it dips hard enough, speculate with a manageably small position only. Anything bigger than that is not worth the risk.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.