Nikola (NKLA) Bulls Beware of a Bearish Blow to the Stock Price

Jul 6, 2020
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Nikola Corporation (NASDAQ:NKLA) was gearing up to challenge Tesla (NASDAQ:TSLA) on its home turf by unlocking the commercial viability and attractiveness of hydrogen fuel cells. This dream, however, is growing murkier at a fairly rapid clip, precipitated by a management that appears obsessed with maintaining lofty equity valuations.

Trevor Milton, the CEO of Nikola Motors, is certainly a man with the capability and the energy to lead his company to success. However, his performance over the past couple of days has been subpar at best. In fact, it was his deliberate ambiguity on Thursday, the last working day before the 04th of July holiday, that mothballed into a 13 percent plunge in the stock price.

Nikola (NASDAQ: NKLA) Surges Nearly 20 Percent on Securing an Order of 2,500 Electric Trucks From Republic Services

Badger Reservations – a Litany of Errors and Miscommunication

The saga began last Monday when Nikola opened reservations for its Badger electric pickup truck. In order to entice customers, the company unveiled as many as 5 reservation packages, each offering targeted amenities. The climax, however, came when the company started to dither in revealing the quantum of initial reservations. First, Mr. Milton claimed that he would only release the numbers upon procuring the necessary approval from his legal team.

Then, on Thursday, Mr. Milton tweeted that the elite $5,000 Badger Honey reservation package had been ‘sold out’:

Immediately after this tweet, the stock price began to plummet, ending the day down $8.71 or 13.22 percent. So, what caused such a severe reaction? Well, as a start, the tweet was essentially meaningless without also revealing the number of $5,000 packages that Nikola had formulated. Bear in mind that Nikola’s CEO has adopted deliberate ambiguity as a strategy and investors are growing increasingly impatient with this tactic. While this strategy worked for Nikola previously, recently it has been posting diminishing returns. With Thursday’s tweet, it appears that investors’ patience finally ran out.

Nikola (NKLA) Facts Directory – Everything You Ever Wanted To Know About The Company

With the stock in a tailspin for the rest of the trading day, Nikola CEO finally revealed some information regarding the Badger reservations in the after-hours phase. However, this effort was bungled and the original tweet was so confusing that Mr. Milton had to take to twitter several times to create order out of chaos. The final version of the reservations tweet was:

Now, we know that the Badger will retail at a price that ranges between $60,000 and $90,000. Let’s give Nikola the benefit of doubt and assume that all reservations pertain to the $60,000 version. Then, in order to compute the total reservation number, we will have to divide the $200 million of future revenue by $60,000. This corresponds to a daily (initial) reservation count of 3,333. Bear in mind that this is the theoretical maximum number of reservations that Nikola is garnering at an early stage. According to Mr. Milton’s tweet, the company is tracking around 1,500 deposits per day. This revelation is fairly underwhelming given that Nikola will not, in all likelihood, be able to maintain this pace. For reference, Tesla’s Cybertruck garnered 146,000 reservations within 2 days of the facility’s initiation.

We noted in an earlier post that a comparison of the gross reservations number may not be an appropriate metric when it comes to gauging the initial success of the Cybertruck with that of the Badger. Firstly, Tesla only demanded a $100 deposit for an initial reservation of the Cybertruck. Nikola, on the other hand, unveiled a number of packages in order to entice prospective customers, with the cheapest package priced at $250 while the most expensive one costing $5,000. Given the current pandemic-era realities and the corresponding macroeconomic weakness, it is not unreasonable to assume that a sizable proportion of Nikola’s prospective customers may have been deterred by the need to deposit at least a quarter of a $1,000 to secure their place in the company’s delivery lineup.

Secondly, Tesla is a giant in the EV sphere, recently overtaking Toyota to become the most valuable car manufacturer in the world, on the basis of market capitalization. Nikola, on the other hand, is a relatively new entrant and has yet to initiate the commercial production of its EVs. It is only logical for potential customers, therefore, to exhibit a modicum of reticence when it comes to Nikola’s offerings. Nonetheless, given the magnitude of disparity in play here, it is hard to ignore the underwhelming nature of Nikola’s reservation drive.

The Exercise of Warrants – a Significant Threat to Nikola’s Stock Price

Of course, the Badger’s reservations are not the only impending cudgel for Nikola bulls. In an S-1 filing with the U.S. Securities and Exchange Commission (SEC) on the 15th of June, Nikola disclosed:

  • up to 890,000 shares of Common Stock that are issuable upon the exercise of 890,000 warrants originally issued in a private placement in connection with the initial public offering of VectoIQ
  • up to 23,000,000 shares of Common Stock that are issuable upon the exercise of 23,000,000 warrants originally issued in the initial public offering of VectoIQ.

Nikola also stated that a further 53.39 million common shares along with 890,000 warrants may be sold by “selling security holders”. However, the company will not receive any proceeds from the sale of these securities.

In a crucial caveat, Nikola revealed that:

“Outstanding Warrants to purchase an aggregate of 23,890,000 shares of our Common Stock will become exercisable in accordance with the terms of the Warrant Agreement. These Warrants will become exercisable on July 3, 2020. The exercise price of these Warrants will be $11.50 per share.”

Since the 3rd of July was a public holiday in the United States, the effective date on which these warrants can be exercised is the 06th of July, potentially unleashing a liquidation tsunami of 23.89 million shares. It is very important to note though that the warrants do not have to be exercised on this date and that the SEC needs to approve any liquidation. Even though the liquidation may not occur on Monday, it does represent a significant threat to a sustained rally in the stock price.

This possibility was echoed by J.P. Morgan as well when it observed in an investment note back in June that:

"The resulting business model could be compelling, however, risks are elevated for this pre-revenue company, and the stock looks fully valued here, so we look for a pull-back or incremental positive development to get more constructive."

Over the long-term, however, JP Morgan appears much more optimistic. As an illustration, the Wall Street behemoth states that Nikola could earn $14 billion in revenue and $1.5 billion to $2.0 billion in EBITDA by 2027.

Disclaimer:

The writer does not hold any long or short position in Nikola shares.

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