Nikola (NASDAQ:NKLA) has not given its investors a smooth ride. At first, NKLA stock was charged up; shares rocketed from $10 to as high as $75. But then scandal hit.
Nikola faked a key product demonstration by infamously rolling a dummy vehicle down a hill.
The company’s deal with General Motors (NYSE:GM) fell into uncertainty. Investors fled the stock, and charismatic founder Trevor Milton gave up his leadership position with the company.
Yet, that wasn’t the end of the story. Nikola’s team, even without Milton, hasn’t given up. The company has pivoted and is trying to make the best of things. Fortunately for its sake, Nikola was able to raise a ton of capital while the company was flying high. This ensured that there’s no liquidity crunch now.
On top of that, management is focused on getting some prototype vehicles working so the market will have a tangible reason to invest. After all of Milton’s charming stories about a hydrogen future that didn’t pan out, investors are now more skeptical. However, at least one investment bank is giving NKLA stock the benefit of the doubt.
JP Morgan Gives NKLA Stock a Second Chance
JP Morgan’s analyst Paul Coster released a positive update about NKLA stock recently. Coster said that Nikola has three of its Tre trucks in Arizona and that they’re being prepared for service.
“At least one of the trucks is already mobile, but optimal performance requires software-based integration of approximately 20 subsystems, which is an iterative process,” Coster said. “The company seems happy with the performance of the trucks, and expects delivery of the next batch (9 trucks) by early February.”
Anyone that remembers Nikola’s unfortunate 2020 probably got flashbacks reading that. “Already mobile” is a particularly choice set of words given how Nikola achieved apparent mobility last time.
Saying the vehicles aren’t quite ready but that the company is pleased with its “iterative process” for improving them also isn’t the most reassuring. Research and development is a tricky process, no doubt. However, Nikola must meet a higher standard for demonstrating trustworthiness going forward given its past behavior.
Regardless, Coster doesn’t seem to have many doubts about Nikola here. He has an overweight rating on NKLA stock and an ambitious $35 price target.
Nikola Has Plenty of Cash
While new CEO Mark Russell inherited a challenging situation, there’s one big plus: Nikola has a bunch of cash. As of last quarter, Nikola had $907 million of cash on the balance sheet and $1.1 billion of total assets. That’s a huge war-chest. Remember, Nikola runs pretty lean given that the company doesn’t have extensive ongoing operations yet.
An EV company with a billion dollars certainly has a variety of alternatives available to it. And Nikola, for better or worse, at least has a well-known brand name at this point as well. So there’s definitely good reason for Nikola retaining some value.
The company is in no danger of bankruptcy anytime in the foreseeable future and it probably won’t have to raise capital either.
That said, what’s it worth?
The company has no meaningful revenues yet, and it will be a long time before you go from a few Tre trucks to a profitable business.
At the current price, NKLA stock is valued at $6.5 billion. That’s quite a multiple of the company’s $900 million of cash on the balance sheet. The market obviously loves EV stocks right now. So the excitement around NKLA stock is justifiable to an extent.
However, you can probably do better within the EV space; there are plenty of firms out there with a more compelling business plan.
Nikola Stock Verdict
Honestly, Nikola’s management team is in a bit of an impossible situation. I’d certainly not want the job myself. The company has to convince the general public that its new prototype vehicles are totally functional and impressive. Yet Nikola’s last display to the public was a sham.
Thus, this is pretty much a no-win setup. If the demonstration vehicles go well, it’s still unlikely to really move the needle. And if anything goes wrong, Nikola will be a public laughingstock once again.
There’s a road back to credibility and acceptance for Nikola, potentially. But it will be a long and bumpy one.
JP Morgan should cool its engines. Nikola isn’t going to viewed as a top-tier EV company again in the near future, and it’d take a minor miracle for NKLA stock to hit that $35 stock price target within the next few months.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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