Credit to Author: Frugal Moogal| Date: Fri, 26 Jun 2020 02:58:10 +0000
Published on June 25th, 2020 | by Frugal Moogal
June 25th, 2020 by Frugal Moogal
On Thursday, May 4th, Nikola Corporation slipped quietly onto the Nasdaq stock exchange under the ticker symbol NKLA, opening at $37.55 a share, and then it spent the rest of it’s debut week bouncing around near that price before more than doubling on Monday, May 8th, when it closed at $73.27. As I write this, the stock is continuing to hover around that price, which puts the market capitalization of Nikola Corporation at around $26 billion.
At first I wasn’t planning on covering Nikola’s stock. In fact, I have been so distracted by my usual day job that I didn’t even realize Nikola was having an IPO until after it happened and the stock had started on its run, which made headlines. By the time this happened, a lot of other analysts had done very solid work looking at Nikola’s business, and I didn’t feel I could add much to that. But, now, a few weeks later, and a few days before Nikola begins pre-orders for its Badger Electric Pickup Truck, I feel like a lot of analysts have overlooked the forest for the trees, so to speak, and are missing the big lesson we should see in Nikola. On the flip side, it seems like many have drawn conclusions about the company due to the stock price that perhaps they shouldn’t have.
(Before going on, a quick note: From here on I’m going to refer not to Nikola’s “price,” but to its “market cap.” Stock price by itself really doesn’t tell us anything, unless you’re also looking at how many shares are outstanding, and that’s how you get market cap … market cap can tell us a lot.)
Let’s start with what Nikola Corporation’s market cap doesn’t tell us: It doesn’t tell us that the company can execute on any of it’s plans.
And Nikola has a lot of plans: The “Nikola World” event in April of 2019 unveiled 5 new electric vehicles. The company unveiled a line of electrified Powersport Vehicles aimed at convincing the public of its EV technology capability. The company plans to create a network of hydrogen refueling stations.
But none of these plans have actually become a real-world product yet. The history of the stock market is littered with companies that told people they had an incredible business plan and tons of great products. Many of those companies saw big gains in their market cap … and then came crashing back down to earth when people realized promises don’t equal products.
To be clear — I’m not hoping that Nikola will fail. In fact, I hope Nikola succeeds and proves that it can bring all of it current plans to market as quickly as it claims. I think that will be difficult, however. A lot of other clean energy analysts have done some great deep dives into what they think about Nikola and its prospects, and I don’t feel that I have much to add here for now.
What I can say is that I have been personally leery of companies that haven’t released a viable product since I was burned a bit by the dot-com bubble of the early 2000s. I can also say that I believe that there will be a place for hydrogen in the future clean-energy economy. I don’t know if Nikola will be the company to bring that about.
There is a lot that I do like about what Nikola has said, however. I like that it plans to generate all of its hydrogen onsite, using renewable energy sources to create it. I like that it plans to build out a hydrogen network using its semi trucks as demand drivers to do so. It’s just — without seeing some actual products, it’s hard to know if the company’s timelines and costs will really be what they say they are.
In other words, Nikola’s market cap doesn’t tell us what Nikola can do as a company. It does show us something else, however …
While I feel Nikola’s market cap doesn’t tell us what the company can do, I feel it shows something else that should give fans of clean technology a real positive feeling.
Let’s look at that market cap for a minute again. As I write this, Nikola’s market cap is a bit over $26 billion. If we compare that to other automakers, it’s an incredible price. Fiat Chrysler currently clocks in with a market cap of $20 billion. Ford is at $24 billion.
Sure, there are other automakers worth more, but the difference here is that Fiat Chrysler and Ford have tons of factories, and have produced tons of products. Nikola is currently valued almost exclusively based on the promise of better technology, and a greener future.
While other automakers (and many analysts) keep saying that the clean transportation revolution is a long way off, the technology isn’t mature, and the industry shouldn’t receive such high valuations, there is clearly a significant amount of money in the market right now that believes that there is money to be made in clean technologies and their stocks.
The market is telling yet another story as well, and it’s one that will push the green revolution forward faster and faster.
Imagine you are a Ford shareholder right now. Your company made and sold over 5.4 million vehicles worldwide last year. Almost 1 million of those vehicles were the popular F-Series trucks, the top selling vehicle in the world, and in a segment known for its margins and profitability. Yet, Nikola, a company that has sold zero products so far, has managed to create a market cap for itself larger than Ford’s just based on a plan for how it will dominate the electric market moving forward.
And it gets worse — not just has this newcomer created a market cap larger than Ford’s, if you’ve held your Ford stock for any length of time, your investment has declined significantly. If you have held your stock for 5 years, it’s lost over 40% of it’s value … including dividends. Nikola hasn’t been around since then, so you might look at Tesla to try to see how its market cap might increase. In the past five years, Tesla’s market cap increased over 350% in the same amount of time.
Let’s put it in actual terms — a $10,000 investment in Ford on June 25, 2015, would, including dividends, be worth $5,805.19 as I write this. A $10,000 investment in Tesla for the same time period would be worth $36,481.34. An investment in Tesla would have done six times better than an investment in Ford.
As an investor (in Ford), you’re looking at two transportation companies, and they’re telling you the same story — the future is in these clean transportation methods, and you’re concerned you’re holding shares of a dinosaur as the meteor strikes. If you’re paying attention to your investments, you’re going to do one of two things:
1) Sell your shares, worried that Ford will continue it’s downward slope, to reallocate your resources to other companies.
2) Demand that Ford, which has all these factories and production skills, hurries along its investment in clean technology.
Pressure to continue to create new products will only get stronger, with the market awarding those perceived to be moving quicker, and punishing those who aren’t. Investors will pressure automakers to overcome dealer networks hostile to selling electric vehicles and increase production of electric vehicles. Companies that do will be rewarded with higher share prices.
This creates a feedback loop to benefit those who transition to new products sooner, which will only serve to accelerate the entire transition.
Nikola Corporation’s market cap may not tell us much about the future of Nikola, but it tells us a lot about just how viable investors feel the clean transportation market is, and the opportunity that it presents. The question now is how will those other companies respond?
I am a Tesla shareholder who has purchased shares within the preceding 12 months. I am not currently a Nikola Corporation shareholder, nor do I intend to initiate a position in Nikola Corporation any time soon. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article in which I discuss matters that I feel may materially affect stock price is published. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.
Frugal Moogal A businessman first, the Frugal Moogal looks at EVs from the perspective of a business. Having worked in multiple industries and in roles that managed significant money, he believes that the way to convince people that the EV revolution is here is by looking at the vehicles like a business would.