Nikola Stock: Buy or Sell After Reverse Stock Split?

Nikola Stock

Nikola (NASDAQ:NKLA) stock reached record lows last week after the hydrogen fuel cell truck manufacturer announced a 1-for-30 reverse stock split, the highest possible ratio. This split, taking effect after today’s closing bell, aims to address Nikola’s violation of Nasdaq listing rules, as its share price consistently traded below the exchange’s $1 minimum threshold.

Maintaining its Nasdaq listing is critical for Nikola, as the company needs to frequently raise cash by selling its shares. However, this reverse stock split may not solve all of Nikola’s challenges, which we’ll explore in this article.

Nikola’s Journey from Boom to Bust

As an early participant in the special purpose acquisition company (SPAC) boom in 2020, Nikola became a symbol of renewable energy excitement. At its peak in 2020, Nikola’s market cap surpassed Ford Motor’s (NYSE:F), suggesting a potential bubble in the EV industry since Nikola hadn’t started delivering vehicles yet. The bubble burst in late 2021, but not before Tesla’s (NASDAQ:TSLA) market cap exceeded $1 trillion, and newly listed Rivian (NASDAQ:RIVN) was valued at over $150 billion. Since then, EV companies, including Nikola, have frequently made headlines for reverse stock splits, guidance cuts, bankruptcies, and capital raises.

Nikola’s Business Restructuring

Nikola has restructured its business to become more focused. It sold the Badger pickup truck program, exited its European joint venture, and announced the liquidation of Romeo Power, which it acquired for $144 million in an all-stock deal in 2022.

Management’s Focus on Volume Growth

Nikola’s CFO, Tom Okray, who has experience with Amazon (NASDAQ:AMZN) and General Motors (NYSE:GM), outlined the company’s strategy during the Q1 2024 earnings call. He emphasized that profitability depends on achieving scale, as optimizing costs without significant volume is impractical. Okray, who joined Nikola in March, detailed plans to increase volumes by targeting national carriers with fleets over 1,000 vehicles and being flexible on the economics of initial deals to build confidence with fleet users. Additionally, Nikola plans to expand beyond its primary markets in California and Canada.

NKLA Stock Forecast

Wall Street analysts have a consensus rating of “Hold” on Nikola. However, last month, Bryan, Garnier & Co. initiated coverage with a “buy” rating and a $1 target price. In January, Baird initiated coverage with an “outperform” rating and a $2 target price. Despite the continued decline in its share price, Nikola trades below even its lowest target price of $0.50, while the mean target price of $1.12 suggests the stock could more than triple from current levels.

Nikola’s Position in the Hydrogen Economy

Nikola is a bet on the expected growth of the hydrogen economy. Hydrogen fuel cell electric vehicle trucks offer longer ranges and faster refueling times than battery electric vehicles, making them attractive for carriers transitioning to green vehicles. Regulatory support, such as the Inflation Reduction Act of 2022 and policies in states like California, also benefits Nikola. The company is developing hydrogen infrastructure in North America under the Hyla brand, which it can monetize as the hydrogen industry grows. Additionally, Nikola expects to recognize revenue from particulate matter (PM) credits this quarter.

The Need for Execution

Nikola must now effectively execute its plan, focusing on significant delivery growth and a clear path to profitability. CEO Steve Girsky emphasized during the Q1 2024 earnings call that the company is in the execution phase, not just planning. Despite the viability of its trucks, Nikola faces challenges, including the need to raise more cash by selling shares, leading to further dilution. The company’s outstanding share count has risen to over 1.3 billion, more than 3.5 times what it was at its 2020 listing.

While Nikola’s stock has reached record lows and may seem attractive, it remains a risky investment due to its weak balance sheet. Given the widespread sell-off in the startup green energy sector, there are more attractive opportunities with clearer paths to growth and profitability compared to NKLA.