Nikola's Valuation Seems Crazy

Matt Posky
by Matt Posky
nikolas 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.

From Bloomberg:

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.

[Images: Nikola]

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12 of 29 comments
  • Inside Looking Out Inside Looking Out on Jun 09, 2020

    Investors are not idiots. They are rational people.They know somethings we don't and they already made a lot of money trading Nikola stocks. What I know is that we are on inflection point right now. Things start changing dramatically and then even faster. I will not be surprised if by 2024 we establish permanent US lunar base and all ICE vehicles will be banned all around world.

    • See 1 previous
    • AnalogMan AnalogMan on Jun 10, 2020

      There are some very smart, insightful, truly brilliant investors out there. Warren Buffet stands out as one of if not the greatest of all time. But after having worked with 'investors' for over 35 years (from the side of companies, including >25 years at several start-ups), I think most 'investors' are greedy imbeciles. They are lemmings, and follow other investors and trends (they call it 'momentum investing'). EVs and Tesla are hot, so many jump on whatever sounds similar and 'ride the wave' (or as they call it, 'surf investing'). Yes, you can make money playing these kinds of games, but you have to be careful, lucky, and have good timing, and it doesn't mean the company is actually making anything. The 'market' is supposed to be rational and may be in the long term, but not in the short term or necessarily for individual companies. Just look at the overall stock market right now - the world is in the early stages of deep global recession, the COVID-19 pandemic is far from over, yet the stock market is soaring. As a finance professor in business school once told us, "The stock market is a great place to make a small fortune - out of a much larger one".

  • DenverMike DenverMike on Jun 09, 2020

    How isn't this a ponzi scheme? Even if there is real products? As far as EV pickups go, Ford can do it cheaper/faster/sooner, and what if Ford decides to sell them at a huge loss, 10's of 1,000's less than theirs?

    • See 7 previous
    • Art Vandelay Art Vandelay on Jun 10, 2020

      @SCE to AUX Ford builds close to a million F Series trucks alone every year. They are rightfully criticized here and other places for many of their business decisions, but any company that underestimates them with respect to pickups does so at their own peril.

  • Nrd515 I bought an '88 S10 Blazer with the 4.3. We had it 4 years and put just about 48K on it with a bunch of trips to Nebraska and S. Dakota to see relatives. It had a couple of minor issues when new, a piece of trim fell off the first day, and it had a seriously big oil leak soon after we got it. The amazinly tiny starter failed at about 40K, it was fixed under some sort of secret warranty and we got a new Silverado as a loaner. Other than that, and a couple of tires that blew when I ran over some junk on the road, it was a rock. I hated the dash instrumentation, and being built like a gorilla, it was about an inch and a half too narrow for my giant shoulders, but it drove fine, and was my second most trouble free vehicle ever, only beaten by my '82 K5 Blazer, which had zero issues for nearly 50K miles. We sold the S10 to a friend, who had it over 20 years and over 400,000 miles on the original short block! It had a couple of transmissions, a couple of valve jobs, a rear end rebuild at 300K, was stolen and vandalized twice, cut open like a tin can when a diabetic truck driver passed out(We were all impressed at the lack of rust inside the rear quarters at almost 10 years old, and it just went on and on. Ziebart did a good job on that Blazer. All three of his sons learned to drive in it, and it was only sent to the boneyard when the area above the windshield had rusted to the point it was like taking a shower when it rained. He now has a Jeep that he's put a ton of money into. He says he misses the S10's reliablity a lot these days, the Jeep is in the shop a lot.
  • Jeff S Most densely populated areas have emission testing and removing catalytic converters and altering pollution devices will cause your vehicle to fail emission testing which could effect renewing license plates. In less populated areas where emission testing is not done there would probably not be any legal consequences and the converter could either be removed or gutted both without having to buy specific parts for bypassing emissions. Tampering with emission systems would make it harder to resell a vehicle but if you plan on keeping the vehicle and literally running it till the wheels fall off there is not much that can be done if there is no emission testing. I did have a cat removed on a car long before mandatory emission testing and it did get better mpgs and it ran better. Also had a cat gutted on my S-10 which was close to 20 years old which increased performance and efficiency but that was in a state that did not require emission testing just that reformulated gas be sold during the Summer months. I would probably not do it again because after market converters are not that expensive on older S-10s compared to many of the newer vehicles. On newer vehicles it can effect other systems that are related to the operating and the running of the vehicle. A little harder to defeat pollution devices on newer vehicles with all the systems run by microprocessors but if someone wants to do it they can. This law could be addressing the modified diesels that are made into coal rollers just as much as the gasoline powered vehicles with cats. You probably will still be able to buy equipment that would modify the performance of a vehicles as long as the emission equipment is not altered.
  • ToolGuy I wonder if Vin Diesel requires DEF.(Does he have issues with Sulfur in concentrations above 15ppm?)
  • ToolGuy Presented for discussion:
  • Kevin Ford can do what it's always done. Offer buyouts to retirement age employees, and transfers to operating facilities to those who aren't retirement age. Plus, the transition to electric isn't going to be a finger snap one time event. It's going to occur over a few model years. What's a more interesting question is: Where will today's youth find jobs in the auto industry given the lower employment levels?