Is Nikola Stock a Sell After a Strong Recent Rally?

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Written By Dean McHugh

Shares of zero-emission transportation start-up Nikola Corporation (“Nikola”) have rallied by more than 50% from last week’s all-time low of $7.25.

Recent Performance Highlights

Credits: DepositPhotos

The main reason behind the bounce has been a short press release which celebrated higher-than-projected Q2 FCEV truck deliveries:

For the first half of 2024, Nikola wholesaled 112 hydrogen fuel cell trucks.

“We have maintained our 2024 momentum with solid wholesale numbers, new customers such as Walmart Canada, and repeat customers like 4GEN and IMC, purchasing vehicles through our dealer network,” said Nikola CEO Steve Girsky.

“We are firmly on the field and are continuing to secure our first-mover advantage in zero-emissions Class 8 trucks in North America, as well as with our HYLA hydrogen refueling solutions”, he continued.

All Nikola trucks are assembled in Coolidge, Ariz.

Financial Challenges

However, investors would be well-served to curb their enthusiasm as the company will be required to raise additional funds sooner rather than later. At the end of Q1, unrestricted cash was down by approximately $120 million quarter-over-quarter to $345.6 million:

Given the unfavorable combination of higher production levels and deteriorating unit economics, quarterly cash burn is expected to increase substantially in the second half of the year.

Production and Economic Concerns

With estimated cash losses of approximately $425,000 per FCEV truck, higher sales volumes are likely to result in increased cash burn as production numbers remain insufficient to achieve economies of scale as also admitted by management on the Q1 conference call:

“There is a market for our trucks and we’ve begun to demonstrate that. That said, profitability will not be where we want it to be until we can build scale. Simply put, it is not practical to optimize our cost structure without a meaningful level of volume”.

Strategic Adjustments

To address the issue, Nikola has altered its go-to-market approach and is now focusing on winning large North American customers by the means of discounted offers.

With many of these potential customers located outside of states with generous subsidy regimes, the company will be required to step in, thus likely increasing cash usage even further.

Financial Outlook

Assuming quarterly FCEV truck production increasing to 125 units in the second half of the year, negative cash contribution would calculate to $75 million, and this number does neither include cash operating expenses nor capital expenditures.

Given the unfavorable combination of higher production levels and deteriorating unit economics, quarterly cash burn is likely to increase substantially in the second half of the year.

Capital Raising Necessity

Nikola would have to raise additional capital in Q4 at the latest point, but it is unlikely the company will wait that long.

Last month, Nikola gained shareholder approval for increasing the number of authorized shares from 53.3 million to a whopping 1,000 million (or almost 1,800%) on a reverse stock split-adjusted basis, thus paving the way for additional shareholder dilution.

Potential for Dilution

However, the company will be required to file a new registration statement with the SEC as Nikola is approaching the maximum amount of $1.2 billion permitted under its existing shelf registration.

In early May, the company had approximately $95 million left under its existing shelf registration, but this number is likely lower today as a result of additional open market sales over the past two months.

Immediate Expectations

With the company facing increased cash usage and the stock price showing signs of life, Nikola is expected to file an automated shelf registration statement on form S-3 at any time now.

Subsequently, the company would be free to increase the pace of open market sales, conduct another public offering or issue additional convertible notes in the very near future and with another dismal quarterly report likely just weeks away, management is expected to take action very soon.

Generously, assuming Nikola being able to raise $300 million in the second half of the year at an average selling price of $10 per share would result in approximately 40% additional dilution for existing equity holders.

Where to Next?

Credits: DepositPhotos

Nikola Corporation’s shares have rallied more than 50% from recent all-time lows after the company reported higher-than-projected Q2 FCEV truck sales.

However, recent changes in the company’s go-to-market strategy are likely to increase cash losses per truck substantially over the next couple of quarters. In combination with higher production volumes, quarterly cash usage is likely to increase materially in the near term.

As a result, Nikola will be required to raise a substantial amount of new capital in the second half of the year.

After shareholders approved a massive increase in authorized shares last month, the company is expected to file an automated shelf registration statement with the SEC at any time now, thus paving the way for increased open market sales or an outright public offering.


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