For even the most bullish investor in the electric vehicle sector, it’s difficult to make a case for Nikola Corp. (NASDAQ:NKLA). Yes, founder Trevor Milton is gone after committing some pretty horrible acts that allegedly defrauded investors in NKLA stock, that doesn’t mean investors feel safe.
As documented in a bombshell report by Hindenburg Research, the misdeeds included a video of a Nikola One supposedly working and in “Drive.” It was actually non-functional and in “Neutral,” rolling down a hill.
Then came what you might call the Hindenburg Crash. Or, should you prefer, NKLA stock rolled downhill really fast.
It’s off 60% since Sept. 8, and 75% from its 12-month peak. Does that mean that now is a good time to buy? Think about it: The unethical owner is out (sort of), the stock is at a bottom, and the EV sector is red hot right now. Consider the good fortunes of Nio (NYSE:NIO) and Xpeng Inc. (NYSE:XPEV). The Chinese EV makers are up more than 1100% and 166% respectively, year over year.
Then again — so sorry, minor detail — those companies make and sell working cars. Nikola doesn’t. That means to a large extent, a play on NKLA stock reeks of speculation.
Sure, the fundamentals of company profit and extended track records are non-existent for almost all EV companies. But scandals being what they are, one has to wonder whether NKLA stock will ever get its show and its vehicles on the road.
NKLA Stock and Signs of Life
For their own part, analysts haven’t given up on Nikola just yet. One less firm follows the company today than a month ago, according to the Wall Street Journal, but the seven remaining analysts place NKLA stock firmly as a consensus hold (two buys, four holds, one sell).
Meanwhile, the consensus share price target sits at $26.67, a third higher than where NKLA stock trades today. But would an investment today mean buying the bottom, or buying a kick in the bottom?
I’ll dare to tread a step further than six of our seven analyst friends. Beyond buy or sell, for the investor on the sidelines we have the category known as “avoid.” And that’s exactly where I weigh in.
The Milton Mess
Here’s how I see it: Nikola is still a company in deep trouble. Just because you’ve thrown the bull (or since this is Wall Street, the bear) out of the china shop doesn’t mean it’s back to business as usual.
The company remains under investigation by the Securities and Exchange Commission and the U.S. Justice Department. That is sort of like having both Iron Man and Spider-Man show up at your door in a foul mood.
It would have been much better if they had shown up at only Milton’s door, as he is said to have masterminded and executed the fraud. Meanwhile, he still owns a third of the company, which makes him Nikola’s largest shareholder. And he doesn’t plan on selling his shares, Business Insider reports. This is the last thing a company under the microscope needs.
Milton is a distraction — a big-time distraction. His dominant position as the leading shareholder of NKLA stock suggests he will still exert influence behind the scenes. Even if he chooses to sit back and let someone else call all the shots at the company he founded (and is very much attached to) the specter of his opinion will always loom large.
Let’s Roll … Someday
Thus the huge challenge facing current CEO Mark Russell is three-fold. First, he must demonstrate without a doubt that Nikola has moved beyond Trevor Milton, even if Milton has not moved beyond Nikola. That may require a very stinging public rebuke at some point.
Next, Nikola must either be cleared of all fraud allegations or make quick and immediate amends should federal punishments come down.
Finally, and especially for the benefit of those who still hold NKLA stock, the company has to produce something. Anything.
As InvestorPlace’s Ian Bezek notes, there’s been some progress with Nikola getting three of its Tre trucks ready for service in Arizona. Just one is operational at this point, though, and, forgive me the cynicism, but can anyone say with any certainty that the one working Tre is actually working? Or is there a steep hill nearby?
Nikola has a lot to prove and if it didn’t have a nice amount of free cash on hand, it would be worth giving up on NKLA stock entirely.
At a minimum, I would say the company needs a) one year to clear its name, b) a way to truly and forcefully divorce itself from Trevor Milton, and c) make and sell a few hundred working, praiseworthy vehicles that stand apart from the EV crowd.
Otherwise, this is going to be a lot like rolling uphill without a motor.
On the date of publication, Lou Carlozo held a long position in NIO.