NKLA - Nikola Is Far From Done If You Are A Long-Term Investor

Summary

• Nikola is burning cash but is unlikely to go bankrupt soon.
• 2024 will be a big year for the company.
• The company has a strong product and market outlook, but investors will need to stomach stock dilution.

Nikola (NASDAQ: NKLA) has been in the news a lot over the years mainly due to the fact it has management change after fraud charges which results in $125 million payment to the SEC. Since then, the company has been increasingly improving its fortunes, with the latest quarter the company finally getting sales off the ground.

Nikola is essentially fighting the high capital costs of running an EV company. Tesla (TSLA) too faced similar calls for failure in its early days, albeit, Tesla did not face any charges of fraud. During the quarter the company delivered 73 trucks, and is more or less on track to significantly increase production in 2023. Right now it has around $300 million of cash and cash equivalents on its books and will be looking to take advantage of current market backdrop including the subsidies which are being offered to EV truck producers, to compete with the broader market.

While the company has not been able to deliver on its 2022 aim of 300 vehicles, the current increase in inventory points to a future which remains relatively steady.

CEO-" Our inventory increased from $52.1 million in Q2 to $81.1 million at the end of Q3, driven by purchases of components and raw materials to support Tre BEV production in Q4 2022 and 2023. " Source: conference call.

Nikola has enough assets and has the balance sheet to continue to raise capital through 2023, and that will likely ensure by 2024 it will get to a point where the company is sustainable.

Investment Thesis: Calls for bankruptcy are unfounded and the company is likely to continue down a sustainable path now that a lot of issues are behind. It is normal for vehicle companies to raise capital multiple times on their way to profitability and Nikola is no exception. Investors should buy the stock provided they are ready for dilution of the stock or/and capital raise through convertible/ debt obligations.

Nikola Market Outlook

Nikola continues to produce multiple models of electric, fuel-cell electric vehicles, along with energy solutions. Currently the company produces only one model, the Tre BEV, which is an electric heavy-duty truck. But 2023 and onwards, the company plans to launch two fuel-cell trucks, mainly the TRE fcev and the TWD fcev , which should help it improve both its product portfolio, and its revenue outlook.

Nikola has also been working on a range of energy solutions, including providing hydrogen infrastructure, now under the name “Hyla ”, to provide an integrated solutions company. Investors are looking more closely at Nikola’s fuel cell operations than they are at its electric vehicle operations, although, the electric trucks should be as lucrative and the infrastructure projects will likely be key to profitability as well. Nikola continued to improve its infrastructure through 2022, and now has operating stations at numerous new locations including Long Beach, California. The company is aiming for 300 tons of production with 50-60 hubs across the U.S. by 2026, which would mean it could cover most of the U.S., although the likes of Tesla has 1400 supercharging stations in comparison . But that shouldn’t affect the company since Hydrogen is a lot faster to refill, and trucking dynamics are different to that of EV cars.

Green Incentives Puts The Price Close To Parity With Diesel

The average Nikola truck costs around $275,000 , much higher than the $170,000 it usually costs. The company previously planned to produce an electric pickup, but cancelled them, and the stock plunged as a result.

Since then the company has been improving its business model in order to entice buyers, hoping to get ahead of the competition. The company is offering numerous deals including a credit line, and truckers are also being offered anywhere between $150,000 to $185,000 in green vouchers depending on the state they’re in. The combination of vouchers and credit lines makes buying the trucks quite attractive.

Furthermore, the design by the time it comes out for the next generation of trucks will include improved mileage, efficiency , torque, and other features, which would likely put the company at the forefront of the electric vehicle market.

Currently, the heavy-duty truck industry stands at $200 billion, and is expected to grow at 6-7% CAGR, over the next 5 years. With a shortage of trucks and significant push towards reducing emissions, Nikola is at the center of what could be a very lucrative future. It remains to be seen though what demand will look like once the incentives go away. But for now as long as it can ramp up production the company remains on strong footing.

Can The Company Continue With The Current Rate Of Cash Spend?

During the latest quarter Nikola spent $118 million in cash, and raised $482 million from financing activities, this was done through three methods, convertible notes, issuance of shares under the Tumim Purchase Agreement, and finally common stock dilution. Therefore, at the end of the period the company now had $403 million in cash and cash equivalents. The cash spend included $118 million in plant property and equipment, as it looks to ramp up production. That number if it remains in line with production estimates could increase to an average of around $700 million per quarter in 2023. Meaning total capital that will need to be raised in 2023 could amount to around $1.5-$2 billion.

The current run-rate in terms of cash spend will continue to increase, and it is likely that during 2023, Nikola raises cash through debt sale and convertible notes, but it is also likely to issue common stock as well. The combination of these factors will likely affect the market capitalization, and stock value, but the long term fundamentals remain intact.

Therefore, bankruptcy and failure are unlikely anytime soon. But the current market capitalization, which stands at $1.35 billion, down significantly from the last 6 months, as the stock price has dropped from $7 per share to $2.50 a share on slow progress. The stock price could further decline before going up, and the market capitalization will have to increase as the company deals with ramping up production.

Projecting into 2023, based on guidelines by management, and the current run rate, means that the company will deliver anywhere from 500-1000 vehicles in 2023. But taking the lower end of the scale, the company is likely to bring in a revenue of around $125-175 million for the year. But that shouldn’t deter investors, as production will quickly ramp up in 2024, as new products, and capacity come online.

In conclusion, this would likely result in total vehicle production significantly ramping up during 2024, which would mean the fortunes of the company would be much better. This means investors will have to wait a bit before they see results. But long-term investors can benefit from the current outlook. Short-term profits aren’t likely, but anyone looking to invest on a 10-year horizon might find that the stock will be much improved in a few years.

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