Nikola Corp. (NKLA) operates as an integrated zero-emissions transportation systems provider. It designs and manufactures battery-electric and hydrogen-electric vehicles, drivetrains, energy storage systems, and hydrogen fueling station infrastructure. The company also develops electric vehicle solutions for military and outdoor recreational applications.

NKLA has been all over the news this year for investors accusing the company of being “an intricate fraud built on lies” based on false statements by the founder and executive chairman, Trevor Milton. NKLA became a publicly traded company on June 4, 2020 through a reverse merger with VectoIQ, a publicly traded special purpose acquisition company.

NKLA has not produced any products yet, and doesn’t even possess a manufacturing factory. The company’s financials are also nothing exciting. In the second quarter of 2020, the company generated just $36,000 in solar revenues, compared to a huge net loss of $86.6 million. The company reported a loss of $0.33 per share compared to the year-ago loss of $0.06 per share.

Despite gaining more than 125% so far this year, a potential downside based on a number of factors has made our proprietary system rate NKLA as a “Sell.”

Here is how our proprietary POWR Ratings system evaluates NKLA:

Trade Grade: F

NKLA is currently trading below both its 50-day and 200-day moving averages of $33.29 and $27.20, respectively, indicating that the stock is in a downtrend. In fact, the stock’s 52.3% loss over the past three months reflects this solid short-term bearishness.

Short-selling research firm Hindenburg accused NKLA of fraud after it published a report criticizing the electric truck maker. The report claims that NKLA has repeatedly hyped its battery and fuel cell technology beyond its true capabilities, and overstated its progress toward the development of its electric truck, including faking a video of its prototype driving on road. Amid allegations of misleading investors and reports of inquiries underway by both the U.S. Securities and Exchange Commission and U.S. Department of Justice, Milton resigned in September.

Buy & Hold Grade: F

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, NKLA is positioned unfavorably. The stock is currently trading 37.5% below its 52-week high of $128.50.

NKLA’s product development is on track to meet the established timeline for the start of production of the Nikola Tre in the fourth quarter of 2021. Moreover, it has recently formed a strategic partnership with General Motors (GM) for the supply of batteries and fuel cells. GM has also taken an 11% stake in the company. It will also provide engineering and validation services to NKLA, and manufacturing capacity.

However, NKLA has admitted to faking the video of its electric hydrogen truck driving prototype in a weak response to the allegations. But it also claimed that the video was now irrelevant as the allegations related to events before 2017, and much more progress has been made since then. Moreover, the lock-up period for company’s insiders, which is followed up after the initial listing of a stock restricting insiders to dump shares in the open market, is expiring on November 30^th. The stock could experience heavy selling pressure once the lock-up period expires.

Peer Grade: D

NKLA is currently rated #20 out of 29 stocks in the Auto & Vehicle Manufacturers industry. Other popular stocks in the group are Tesla, Inc. (TSLA), Toyota Motor Corporation (TM), and Workhorse Group, Inc. (WKHS)

NKLA has gained 125.8% so far this year. While WKHS and TSLA beat NKLA by gaining 633.6% and 436.5%, respectively, year-to-date, TM lost 5.2% over this period.

Industry Rank: B

The StockNews.com Auto & Vehicle Manufacturers industry is ranked #19 out of the 123 industries. The companies in this industry manufacture and sell vehicles such as passenger cars, light trucks, motorcycles, and more. The profitability of individual companies depends on manufacturing efficiency, product quality, and effective marketing. Demand is driven by employment and interest rates. Underutilization of production plants due to lockdowns and lower auto loan generations have severely impacted the industry.

Overall POWR Rating: D (Sell)

Overall, NKLA is rated a “Sell” due to its recent developments, weak fundamentals, and short-term bearishness as determined by the four components of our overall POWR Ratings.

Bottom Line

NKLA has had a massive run and soared so far this year, but recent events have turned out to be sour for the company. Traders continue to reject the stock following the departure of its founder. Investors consider NKLA as a value trap that may seem cheap at first glance, but get progressively cheaper and cheaper until the stock destroys all the wealth.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is also not favorable for NKLA. The company is not profitable yet. The consensus EPS estimate for next year indicates a mere 2.3% growth year-over-year. This outlook is expected to keep NKLA’s price momentum dull over the long term.

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NKLA shares were trading at $20.12 per share on Friday morning, down $3.18 (-13.65%). Year-to-date, NKLA has gained 94.96%, versus a 10.08% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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