NKLA - Nikola: Failure More Likely Than Ever After BEV Truck Disaster

Summary

• Company reports better-than-expected Q3 results but warns of severe issues related to its Nikola Tre BEV truck offering.
• Customers are reluctant to order the truck due to required investment in charging infrastructure and weakening macroeconomic conditions.
• In contrast to previous statements, the recent acquisition of ailing battery supplier Romeo Power will likely result in a major drag on gross margins for the time being.
• In my opinion, Nikola should focus on its upcoming FCEV truck offering but the company is likely to run out of funds before the scheduled commercial launch in the second half of next year.
• Given the company's bleak prospects and ongoing requirement to sell large amounts of new shares into the open market, investors should consider selling existing positions and moving on. Even a short position should yield decent profits going into next year.

Note: I have covered Nikola Corporation ( NKLA ) previously, so investors should view this as an update to my earlier articles on the company.

Shares of zero-emission transportation start-up Nikola Corporation ("Nikola") are down by more than 75% since my last update on the company fourteen months ago.

Last week, Nikola reported somewhat better-than-expected Q3 results but the company's cash usage continues to increase. For the quarter, negative free cash flow amounted to $237 million.

Mostly due to aggressive utilization of the recently announced $400 million equity distribution agreement with Citigroup Global Markets ( C ), the company's unrestricted cash balance was down by just $127 million to $316 million at quarter end while outstanding shares increased by more than 10% sequentially to approximately 479 million.

Shares initially traded up by almost 10% but quickly reversed course during the conference call after new CEO Michael Lohscheller admitted to severe issues with the company's Nikola Tre BEV truck:

1. Customers are reluctant to order the truck due to required investment in charging infrastructure and weakening macroeconomic conditions.
2. In contrast to earlier statements, the recently completed acquisition of battery supplier Romeo Power ("Romeo") will result in a significant drag on gross margins for at least the next five quarters as Romeo has been subsidizing the battery packs supplied to Nikola by an amount of $110,000 per truck (!).

Due to the ugly combination of weak demand and elevated production costs, the company will abstain from scaling Nikola Tre production to previously anticipated levels for the time being.

Nikola also decided to defer Phase III expansion of its Coolidge, Arizona manufacturing facility to 2024 thus reducing anticipated cash burn for next year by $345 million.

With Romeo Power on the verge of bankruptcy, Nikola was more or less forced to acquire the sole battery supplier for its U.S. operations but just like JP Morgan analyst Bill Peterson on Thursday's conference call, investors should scrutinize management's decision not to literally pull the plug on the BEV truck, particularly with financially stronger incumbent players launching similar offerings left and right.

At least, in my opinion, Nikola should focus on its fuel cell truck offerings with commercial production currently scheduled to commence in the second half of 2023.

That said, I fully expect the company to run into similar troubles with the upcoming fuel cell version of the Nikola Tre, due to a persistent lack of hydrogen infrastructure and the massive amount of required customer investment.

While Nikola still plans to offer a bundled lease for its FCEV trucks including hydrogen fuel and maintenance at a fixed price per mile, the model will be reliant on the company's ability to achieve a minimum hydrogen fuel efficiency to avoid heavy losses under the leases.

Even with the potential benefits from the recent Inflation Reduction Act ("IRA"), the company will likely be forced to heavily subsidize its FCEV trucks to attract customer interest.

But Nikola simply lacks the capital required to successfully scale commercial production of its zero-emission trucks, particularly with the recent addition of ailing Romeo Power which is likely to result in cash burn increasing even further.

Even when assuming the company utilizing the entire $400 million equity distribution agreement over the next three quarters, at the current rate of cash usage Nikola would run out of funds by the end of H2/2023.

Admittedly, there's nothing that would stop the company from entering into a new equity distribution agreement and selling even more shares into the open market but this scheme is not going to work in perpetuity.

Over time, more and more market participants are likely to give up on the stock due the company's obvious issues and the ongoing drag caused by an ever-increasing number of shares being sold into the open market on a regular basis.

As a result, trading volume is likely to decrease going forward thus limiting the company's ability to sell sufficient amounts of shares.

Please note also that the company has abstained from further utilizing its existing common stock purchase agreements with Tumim Stone Capital LLC ("Tumim Stone") likely due to these equity lines of credit being subject to a 4.99% ownership blocker.

With Nikola's market capitalization having been reduced to $1.35 billion, maximum availability under the common stock purchase agreements calculates to below $70 million assuming that Tumim Stone has already disposed of previously acquired shares under the agreements.

Bottom Line

At least in my view, the company should have abstained from acquiring ailing battery supplier Romeo Power and rather pulled the plug on the Nikola Tre BEV offering due to lack of customer demand and Nikola's ongoing inability to get a handle on production costs.

But even assuming further aggressive utilization of the company's equity distribution agreement and concentrating all efforts on the Nikola Tre FCEV, the company will likely run out of funds ahead of the scheduled commercial launch in H2/2023.

At some point, Nikola won't be able to cover its capital needs from additional share sales into the open market anymore and with limited funding alternatives, in my opinion, bankruptcy appears to be the most likely scenario for the company.

Given Nikola's bleak prospects and ongoing requirement to sell large amounts of new shares into the open market, investors should consider selling existing positions and moving on.

Even a short position should yield decent profits going into next year even when considering current borrowing rates of almost 20%.

As always, don't bet the farm on short positions and adequately manage your risk.

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