Hype ran hot in the summer of 2020, when reverse mergers were in vogue and Nikola (NKLA -1.93%) garnered Wall Street’s attention as an electric-truck maker to watch. Holding Nikola stock turned out to be an unfortunate strategy, however, as not selling would have turned a $2,000 investment into just $40.
Yet where some folks see carnage, others may see opportunity. Should investors with a speculative streak apply the “buy when there’s blood in the streets” principle to Nikola stock in 2024?
It’s worth considering, as it might seem that the market must have priced Nikola’s woes into the stock by now. Still, even at fire-sale prices, Nikola stock looks more likely to approach zero than make you a hero.
Cash crunch and the founder’s conviction
Even as the major U.S. stock market indexes sailed higher in late 2023, the fourth quarter wasn’t kind to Nikola’s shareholders. CFO Anastasiya Pasterick tendered her resignation after just six months at the job. Also, Nikola reported a significantly widening third-quarter net loss, from $236 million in the year-earlier quarter to $426 million in Q3 2023.
Nikola stock fell below the psychologically significant $1 level during the third quarter. Perhaps the market wasn’t as enthusiastic about hype-fueled, money-losing operations as it was in 2020 and 2021.
Clouding the outlook further is Nikola’s less-than-ideal capital position. The automaker ended Q3 with $363 million worth of cash and cash equivalents, while Wall Street reportedly expects that Nikola will need nearly $500 million in cash to fund its operations during the next four quarters.
Nikola’s short and shallow cash runway isn’t what’s dominated the headlines, though. The juicier story is Nikola founder Trevor Milton’s fate: He’s been sentenced to four years in prison for misleading the company’s investors.
It’s easy to see why Milton’s sentence is a headline grabber, but he’s not part of the company anymore. Milton’s reputational damage to Nikola is worth noting, but cautious investors should focus on the company’s cash crisis more than Milton’s unfortunate story arc.
Small partnership, big share sale
Moving past the Milton morass, two recent news items should help prospective investors evaluate Nikola’s future prospects. First, the company proudly announced a decade-long strategic partnership with hydrogen refueling station solution provider FirstElement Fuel.
This collaboration may be long in duration, but it seems limited in its actual impact. In summary, FirstElement Fuel has agreed to refuel Nikola drivers’ vehicles at a single truck stop in Oakland, California. So while there are certainly possibilities for expansion of this arrangement, it currently doesn’t sound like a game changer for Nikola and its shareholders.
Finally, there’s no getting around the implications of Nikola’s recent debt-issuance disclosure. Specifically, Nikola plans to sell $100 million in common stock and $200 million worth of bonds — or “green convertible senior notes,” to be exact.
This isn’t Nikola’s first debt issuance, and as you might expect, the proposed share printing and selling wasn’t well received on Wall Street. The prospect of share-value dilution is probably what prompted a 23% sell-off in Nikola stock the next day.
Much as the market lost faith in Nikola’s founder, investors might also lose faith in the company itself. After all, now that Nikola is unapologetically going down the dilutive capital-raising path, what’s to stop the company from repeating this behavior in the future?
With the company pursuing the quick-fix debt-issuance route to address its subpar capital position, Nikola stock just doesn’t look like a confident pick for prudent investors.
David Moadel 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.
