Let Fading Nikola Stock Go For Now

NKLA stock is intriguing, but even after a fade valuation is a big question mark

I’m a big believer in the long-term potential of electric vehicles. But I’m not a bull on Nikola (NASDAQ:NKLA) yet. Nikola stock certainly has its positive qualities, particularly with a sharp fade from June highs. It has its fair share of risks, too.

The core reason for skepticism is simple. Nikola stock, even off the highs, has a market capitalization near $14 billion and essentially zero revenue. Production won’t even begin until next year.

That’s not the only reason for caution, however. Notably, Nikola is embracing technology with a long history of disappointment. Competition is intense already and will only get tougher.

Of course, the news isn’t all bad. The market should be enormous. Electric vehicles are one of the megatrends that should underpin what I’ve called the “Roaring 2020s.” If Nikola can be successful — even if it falls short of its most ambitious targets — a $14 billion valuation will seem reasonable. And Nikola’s technological choices make more sense given its focus on commercial trucks.

There are reasons for optimism. And Nikola stock is less expensive than it was, having pulled back a whopping 62% from June highs. I’m not convinced, however, that’s it’s cheap enough — or at least, won’t get cheaper.

A Different Kind of EV Play

Nikola gets lumped in with other electric vehicle plays, but its technology is different than that of other companies in the space, particularly the newer breed. Nikola is basing its lineup on hydrogen fuel cells, as opposed to the battery-powered offerings from most other players.

The reliance on fuel cells makes some sense, particularly for Nikola’s long-haul trucks. Those larger vehicles have more room to carry fuel cells. Meanwhile, Nikola has to build out a nationwide network of hydrogen fueling stations, which are nearly impossible to find outside of California. It’s far easier to build that network along interstate highways to service long-haul trucks than to try and match passenger car demand.

But fuel cell development also is riskier. It’s not as if the technology is new: it was first developed in the 19th century. The first prototype vehicle was demonstrated in 1959.

Commercial success has proved fleeting, however. Hydrogen supply has been one problem: for instance, an explosion at a production facility last year impacted the small fleet of fuel cell-powered vehicles in California.

More broadly, the technology simply hasn’t panned out. Fuel cells have been the technology of the future, and the worry is that they may stay that way.

Again, Nikola’s trucking focus might make fuel cell technology finally viable. But the company is following a path that, at least in the past, usually has led to failure.

Nikola Stock Price and Valuation

It’s worth emphasizing: Nikola still has a real chance at success. Its choice of fuel cells for commercial trucks makes sense. It’s already won a large order for waste management. And the Badger pickup truck admittedly looks sharp.

But this, too, is worth emphasizing: Nikola still is a startup. It generated just $95,000 in revenue in the first half of this year. That revenue actually came from the installation of solar panels at the home of founder Trevor Milton, according to Nikola’s Form 10-Q filing with the U.S. Securities and Exchange Commission.

Nikola simply has a lot of work left to do. And while Nikola stock clearly is much cheaper than it was weeks ago, a $14 billion valuation is hardly inexpensive. Those June highs seem driven by an overoptimistic market combined with a thin float. It’s likely not a coincidence that NKLA has weakened since it forced redemption of its warrants, which brought new supply of Nikola stock to market.

That recent fade looks worrisome from a technical perspective as well. I argued last month that if NKLA broke $40, the charts suggested a path to $30 or worse. Nikola indeed breached that level and already is at $35. It’s dropped below the 50-day moving average as well, another worrisome technical signal.

Between valuation and technicals, there are real worries here, even after the big fade from June highs. Nikola stock can get cheaper. It needs to before it becomes one of the best EV stocks to buy.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.