Down 96% From All-Time Highs, Nikola Looks Completely Boxed in

There’s a key fact to keep in mind about Nikola (NASDAQ:NKLA): its original business model was more financial than technological.

That seems a weird claim to make about a company that sells electric trucks. It seems particularly weird in the context of the Nikola story.

After all, the company’s founder, Trevor Milton, was found guilty of fraud precisely because a jury believed he lied about his company’s technological prowess. Even before that trial, a 2020 activist short report from Hindenburg Research is perhaps best remembered for revealing that Nikola’s truck was a “pusher” (a video that suggested that the truck was being driven on an open road was actually of the truck being rolled down a hill).

The simple story often told with NKLA is that investors bid up the stock because they believed it could be a technological leader in an enormous market. They then sold the stock because the Hindenburg report undercut that belief; only a few months later, the broader electric vehicle sector went into a free fall, taking NKLA down even further.

There’s some truth there, certainly — but it’s not the whole story. In March 2020, when Nikola announced its plan to go public via a merger with SPAC (special purpose acquisition company) VectoIQ, the company itself said its edge was primarily financial.

As Milton himself put it at the time, Nikola could offer a flat, all-in-lease payment to trucking companies that would guarantee total cost of ownership. But Nikola itself didn’t plan to create much of that offering itself. It would contract out for hydrogen supply and use partners to build a nationwide fueling network. Even most of the components going into Nikola trucks would be outsourced.

That case has blown up. The company has dramatically reduced its plans for a nationwide fueling network. Nikola now plans to supply hydrogen itself, but that offering won’t be fully in place until 2026.

The plunge in NKLA stock itself has been a big reason why: without a high stock price, Nikola hasn’t been able to raise the capital needed to execute those ambitious plans.

Even below $3, the problem for NKLA stock is that the company hasn’t found another strategy that can actually work. With the balance sheet stretched, Nikola is about out of time to do so.

The Big Reveal on the Q3 Call

One key edge to Nikola’s original strategy was that it could accelerate the company’s growth. Getting a truck and consistent fueling supply and expert maintenance in one package removed pain points for customers.

But Nikola can’t offer that package: it simply doesn’t have the cash. The company ended Q3 with barely $300 million in unrestricted cash on its balance sheet. It’s burned $550 million through the first three quarters of the year. With the market capitalization now at $1.2 billion, Nikola will have to dilute shareholders simply to survive.

The company, at the same time, is learning the limits of its less expansive plans. On the Q3 conference call, chief financial officer Kim Brady admitted that the company would miss its guidance for deliveries of the BEV (battery-electric vehicle) Tre. A big part of the problem is that customers are worried about the charging infrastructure backing the Tre.

The same problem is likely to arrive on the fuel cell side of the business when commercial production of FCEVs arrives next year. Whatever the power source, customers won’t buy the trucks without charging stations; suppliers won’t build the charging stations without trucks.

Nikola’s edge was, if all went well, its ability to bust through that catch-22. Of course, all hasn’t gone well.

What’s Left Here, Really?

Brady’s disclosure on the Q3 call overshadowed earnings that were better than Wall Street expected. NKLA wound up selling off after the report and closed Monday at an all-time low.

That alone is no reason to buy the stock. Truthfully, there don’t seem like there are good reasons. Nikola’s cash problem is significant. At its current pace, the company will only make it for a couple of more quarters — but that’s not even the whole story. Once the fuel cell trucks start production, losses should actually increase, as the company manufactures initial units at a loss. (There’s no alternative to those losses; it’s simply the nature of start-up auto manufacturing.)

In a best-case scenario, Nikola raises capital by selling stock. But as the stock price declines, so does the amount of capital it can raise in that manner. Nikola almost certainly would have to dilute current shareholders by half simply to raise $1 billion — and $1 billion, even focusing just on truck development, simply is not close to enough.

Even buying time doesn’t mean Nikola succeeds. Again, this was not a company that planned to necessarily compete on quality or technological innovation. Yet in FCEVs, it’s going head to head with Hyundai (OTC:HYMLY) and Toyota (NYSE:TM), two titans of high-tech manufacturing.

The path to success here simply is so narrow. It requires the company to walk the razor’s edge of raising capital through share issuance (without tanking the stock further) and investing that capital behind the business. It requires customers to take the leap into FCEVs or BEVs despite lackluster infrastructure. And it then requires Nikola to outcompete some of the world’s greatest manufacturers to gain market share and grow revenue fast enough to reach profitability.

Yes, Nikola stock is down 96% from its all-time highs. But that’s not what matters. What matters is that Nikola still has a market capitalization of $1.2 billion — and this hardly seems like a business worth that much.

Disclosure: As of this writing, Vince Martin has no positions in any securities mentioned.