Nikola's Valuation Seems Crazy
Nikola, the Phoenix-based EV startup that hopped on the Nasdaq last week, finds itself awash in capital despite not having much to show for itself it terms of sellable product.
No matter, as it doesn’t take a sound business model or originality to thrive on Wall Street. Nikola hasn’t even seen fit to come up with a unique moniker for itself and instead uses the scraps left by Tesla Motors’ not using the full name of the inventor that serves as its inspiration. However, Nikola is designing battery/hydrogen-driven semi trailers and pickup trucks — which are the freshest fad in the industry at present. Investors took notice and pushed Nikola’s market cap past $26 billion on Monday. It just kept climbing, too, with only the eventual promise of product and profitability to spur them on.
While one could argue this is not all that different than Tesla’s trajectory (which has also been wildly overvalued), Nikola’s share price exploded almost overnight. Attention was thrust onto the brand after it started seeking cash in May to go public in a reverse merger. The plan was to join with VectoIQ Acquisition, a Nasdaq-listed, publicly traded special purpose acquisition firm, and ride it out on the stock market as a new/old entity.
The move worked, sending its share price through the roof for reasons none of us seem equipped to accurately discern. On Monday, the already sky-high valuation doubled on itself and continued to climb through the rest of this week.
The $34 billion market capitalization Nikola had at the [Tuesday] intraday peak belies the company’s fundamentals. Nikola is forecasting zero revenue for 2020 and its first $1 billion year in 2023. It doesn’t expect to be fully utilizing an Arizona assembly plant that it hasn’t built yet until 2028.
And yet Ford Motor Co., which is expected to report about $115 billion of revenue for this year, has trailed Nikola by market cap at several points in intraday trading. Many skeptics have questioned for years how much electric-car maker Tesla Inc. should be worth. But with Nikola, investors have taken appraisals of zero-emission vehicle manufacturers named after a celebrated Serbian-American inventor into the stratosphere.
“People are looking at this as the next Tesla, and they’re being stupid. Investors are being ridiculous,” Sam Abuelsamid, a transportation analyst at research firm Guidehouse Insights, said by phone. “While I think the tech absolutely has the potential to be disruptive, I don’t know that Nikola in and of themselves are, necessarily.”
Startups need funding to get the ball rolling, but we’ve seen truckloads of cash poured into some with little to show for it. While it’s too early to tell what kind of startup Nikola will be, we remained shocked at the bizarre amount of faith investors seem to have in it. Thus far, the brand has promised to deliver electric Class 8 heavy-duty trucks by the end of next year — starting with the Euro-market Tre — and follow that up with hydrogen variants in 2023. The current plan is to lease them to companies using rates that it believes will be competitive with owning and operating diesel trucks.
It has also said it will soon begin taking reservations for a smaller pickup model called the Badger. Unfortunately, that unit won’t exist unless it partners with an established automaker for production. That partner has been hinted at, though no one’s naming any names. Either way, we’re of the mind that this announcement is probably what got already eager investors to further widen their wallets on Monday. Wall Street has shown itself willing to jump the gun whenever green tech (apparitional or legitimate) is on the line.
While the brunt of its business currently takes place in Europe, Nikola is planning to build a 1 million square foot facility near Phoenix and hopes to expand the nation’s paltry hydrogen fueling network in order to make the manufacturing of FEVs make any sense. From there, it plans to expand its offerings and work on getting the facility operating at its maximum capacity — a task it doesn’t foresee completing until 2027.
It’s ambitious for a company with zero revenue, but that doesn’t necessarily preclude it from being a success. The real danger seems to lie with Nikola’s insistence that hydrogen power is the way to go when there’s not much evidence to support the claim. Likewise, we’ve heard countless engineers tell us there’s a severe scaling problem when it comes to battery technology. The bigger the payload, the bigger the battery needs to be to achieve a useful range… thus increasing weight… requiring more energy. Before you know it, you’re going around in circles. Modern batteries may not be sufficient to support the kind of energy density required for long-haul trucking. Still, everyone claims another breakthrough lies just around the corner and, to be fair, battery technology has evolved quite a bit over the past decade.
As for the insane share price, we’ve given up trying to predict how investors respond to the automotive industry. It hasn’t made sense in years.
A staunch consumer advocate tracking industry trends and regulation. Before joining TTAC, Matt spent a decade working for marketing and research firms based in NYC. Clients included several of the world’s largest automakers, global tire brands, and aftermarket part suppliers. Dissatisfied with the corporate world and resentful of having to wear suits everyday, he pivoted to writing about cars. Since then, that man has become an ardent supporter of the right-to-repair movement, been interviewed on the auto industry by national radio broadcasts, driven more rental cars than anyone ever should, participated in amateur rallying events, and received the requisite minimum training as sanctioned by the SCCA. Handy with a wrench, Matt grew up surrounded by Detroit auto workers and managed to get a pizza delivery job before he was legally eligible. He later found himself driving box trucks through Manhattan, guaranteeing future sympathy for actual truckers. He continues to conduct research pertaining to the automotive sector as an independent contractor and has since moved back to his native Michigan, closer to where the cars are born. A contrarian, Matt claims to prefer understeer — stating that front and all-wheel drive vehicles cater best to his driving style.
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