Nikola(NASDAQ: NKLA) and its shareholders have had a tumultuous journey. The company's founder and former CEO was convicted of wire fraud and securities fraud, and the stock has lost over 99% of its value. Today, Nikola is working to rebuild its reputation while establishing its business in a promising industry.
At face value, Nikola resembles a lottery ticket, a potential millionaire-making investment if things go well. The stock's market cap is just $428 million, which leaves room for a ton of upside if Nikola's electric semitrucks can catch on. But investors must realize that some games aren't worth playing.
I won't tell you that Nikola can't succeed, but the cost of success will likely come at shareholders' expense.
Upside-down unit economics
Nikola's business sounds appealing at first. The company builds electric semitrucks. It sells a short-range model that uses rechargeable electric batteries and a long-range model that uses hydrogen fuel cells. There are approximately 2.9 million semitrucks on America's roads today, and the corporate emphasis on lowering emissions is a potential opportunity for companies like Nikola that can offer a clean alternative to diesel trucks.
Unfortunately, Nikola faces a common challenge among start-up automotive companies: getting volume high enough to generate a cash profit.
Nikola's current financial numbers for each vehicle (also called unit economics) are ugly. In Q1, the company delivered 40 trucks for $7.5 million. The problem? It lost $57.5 million on them. That's a gross loss, too, which doesn't include other expenses like research and development or marketing. Management has admitted to cutting prices on customers' initial orders to get a foot in the door, hoping to make up for it on future orders.
Worse yet, Nikola's gross profit margin significantly declined to negative 768% in Q1 2024 from negative 213% the prior year. In other words, Nikola's losses may not have peaked as production increases.
Why Nikola is eating its tail
Nikola's struggles aren't unique to young companies that fund expensive factories. But Nikola's shallow pockets don't buy it much time to work through these challenges. The company burned approximately $132 million in Q1, with $345 million in cash on the balance sheet. Assuming Nikola's losses don't change, that's enough cash to fund the business until year-end.
It's apparent that Nikola is unlikely to become a profitable business in nine months when its cash burn is nearly 20 times its revenue.
So, what's next? Nikola will likely continue issuing stock to raise money. As you can see, the number of shares has already multiplied over the past few years:
NKLA Shares Outstanding data by YCharts
Remember, increasing the number of shares decreases the value of existing shares (dilution). It's a vicious cycle as the stock declines because a lower share price requires issuing more shares to generate the same amount of cash. In other words, Nikola is eating its tail.
A likely unhappy ending for investors
Shares have fallen over 99% because it's unlikely that this will end well for shareholders. The company's $200 million convertible bond due in 2026 will almost assuredly be converted to stock or renegotiated at awful terms for shareholders. It's such a large amount (half of Nikola's current value) that it could push the company to seek bankruptcy protection, which would likely wipe out common shareholders.
I'm not afraid of speculative investments. But Nikola arguably goes beyond speculation and resembles a company dying a slow death. Yes, that's harsh. But Nikola is far from the financial place it needs to reach to survive, which is the most likely outcome.
Nikola stock is a lottery ticket in the sense of the phrase that winning is so unlikely that you're better off not playing at all. That's not the type of potential millionaire-making stock investors should look for.
Should you invest $1,000 in Nikola right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
