A Warning About Nikola's Recent Stock Surge

As I write this on Thursday afternoon US time, Nikola (NKLA) is posting massive gains, up close to forty percent from Wednesday’s close. That means that the stock has gained more than two hundred and fifty percent since it hit its all-time low of $0.52 just over a month ago. That is a “meme-stock” like performance and the chances are that the jump isn’t over yet, but if you are tempted to get involved, understand one thing. Just like the original meme stocks like GameStop (GME) and AMC entertainment (AME), it will probably give back most if not all of its big gains before too long. The reasons are a little different, but the end result will likely be the same.

The jump on Thursday was caused by the announcement of a deal with BayoTech Inc., a hydrogen fuel producer and supplier. BayoTech will buy up to fifty of Nikola’s HYLA brand fuel-cell powered trucks, while Nikola will, in turn, use BayoTech hydrogen. It sounds like a mutually beneficial deal and an order for fifty trucks is no bad thing for Nikola, but those of us who have been following Nikola for a while will get a nasty sense of deja vu. We have seen this movie before, and it did not end well.

Back in June of last year, Nikola also made a big announcement about an order, at that time from Walmart. That prompted a lot of small investors to pile into NKLA, but they were disappointed. The stock lost around ninety percent of its value over the next year or so as institutional investors unloaded. The big boys who were selling didn’t care about one order: they were looking at the balance sheet and cash flow of the company, and what they saw wasn’t pretty. It still isn’t.

The numbers from Yahoo Finance show that when they last reported, NKLA had $136 million of cash on hand, but had negative free cash flow of just over $509 million in the previous twelve months. Now, that situation will have improved somewhat as Nikola has started to deliver vehicles, but however you look at it and even allowing for some improvement, that is not a healthy balance sheet. The obvious way for a company in that situation to improve matters, particularly when their stock is soaring, is for them to raise capital by issuing equity, but that isn’t about to happen soon for NKLA. Just a few days ago, shareholders, not wanting to dilute their already tanked shares, voted to delay a proposed equity raise.

Auto manufacturing of any kind is a capital-intensive business, and capital is what Nikola is lacking. Their products, designs, and technology may be great and in demand, but if they can’t afford to build the trucks, none of that matters. To get to the point where they can, they will have to either add debt or issue stock once the shareholder delay has expired, and either way it will dilute the value of existing stock.

As I said, though, in the short term the big gains can continue. In part that is because there is an element of a short squeeze here as you would expect with any stock that has collapsed to pennies and then jumped 250% in a month. However, this is not like GME or AMC, where heavily leveraged shorts left hedge funds vulnerable to a squeeze. As of the last reported numbers, short interest in NKLA ran at about eighteen percent of shares outstanding, a not inconsequential amount, but not on a par with, say GameStop, where short interest reached an astonishing 140%. There will also be a good degree of FOMO as the inevitable comparisons to the early days of Tesla (TSLA) proliferate, and that will probably drive the stock for a few more days. However, this is not Tesla. This is a company struggling to avoid a complete meltdown right now, not one struggling to decide how fast to grow.

So, while the move up in NKLA may continue for a while and a challenge of the $3 level is definitely on the cards, it is a quick in-and-out trading opportunity at this point, not a long-term hold proposition. If you are going to get involved, it is important that you understand that distinction and that you take a reasonable profit before the stock turns too hard. Once it does turn, it will quickly become too late to get out.