A lot of people in the stock market want Nikola Corporation (NKLA) to be the next Tesla. Unfortunately, the company filed a prospectus allowing shareholders to dump a large amount of shares that will cause an overhang on the stock.
Nikola has yet to generate revenues from vehicle sales, yet the stock already has a market value of $21 billion, an amount approaching the level of Ford. The company has the innovative promise similar to Tesla in the vehicle space with the goal of building a fleet of hydrogen fuel-cell electric trucks, but the hype extends far beyond reality here and the selling shareholders know this.
The company only went public on June 4 via a merger with VectoIQ, yet shareholders are already getting ready to leave. You can’t blame them with the stock soaring from below $15 before the deal was announced to above $90 at the high point.
A few weeks ago, the company filed a prospectus to allow shareholders to unload 23,890,000 warrants and 53,390,000 shares for a combined 77,280,000 shares at a future date. The good news is that Nikola will receive the $11.50 value per warrant for total aggregate proceeds of $275 million. The bad news is that shareholders want to sell over 20% of the company, giving the stock an overhang until these shares are sold.
As a result, Nikola will have around $1.0 billion in cash to fund operations.
Not Close to Tesla Yet
The market is already assigning a Tesla valuation to a company without a production vehicle. At the end of 2019, Nikola listed 14,000 orders for a $10 billion backlog. The company now lists orders of up to $14 billion.
The issue here is that full production isn’t expected until 2022 or possibly 2023 at the earliest. Tesla didn’t see its stock surge beyond $40 until back in 2013 when revenues reached $2 billion.
The electric vehicle company had a long-proven concept with questions only surrounding Elon Musk’s ability to scale operations to justify the share price. After reaching $2 billion in revenues in 2013, the company took four years to generate $14 billion in total revenues.
Nikola might have a large order book, but it is going to take a considerable amount of time for it to ramp up production. Tesla provided a prime example of how even a cutting-edge manufacturer struggled mightily to meet production targets for years.
The key investor takeaway is that the valuation for Nikola far exceeds where Tesla traded, even when the latter already had a strong business. Although it’s unclear whether all shareholders will dump these shares, investors should sit on the sidelines until the overhang is gone.
The pre-revenue company is fully valued, with NKLA pricing in perfection for an unproven business model. Even J.P. Morgan analyst Paul Coster has a $45 price target on the stock, based on potential 2027 EBITDA of $1.7 billion. Anytime analysts start using numbers out seven years, investors better beware.
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Disclosure: No position.