The electric vehicle (EV) industry is propelling to dominate the global automobile industry, amid rising climate change concerns and lower recurring costs. Though the overhead expenses of an EV are generally higher than traditional vehicles, its lower operating and maintenance costs have been incentivizing people to make the switch. Tesla, Inc. (TSLA) is one of the pioneer manufacturers to put the EV industry on the radar, with its first vehicle Roadster reaching unprecedented highs in 2008. Since then, TSLA has emerged as the world-leading producer of EVs, with Tesla Model 3 becoming the best selling plug-in EV across the world.

Many companies have entered the burgeoning EV industry since then, one of the most noteworthy players being Nikola Corporation (NKLA). Specializing in hydrogen fuel cell-based heavy-duty trucks, the company managed to create a buzz in the market before even manufacturing its product, through its aggressive marketing strategies. This helped the stock gain 178.5% to hit its 52-week high of $93.99 on June 6th, within two days of its market debut.

In terms of past three-month price performance, TSLA is the clear winner with 30.4% gains versus NKLA’s 37% decline. However, both companies declined over the past month given the market’s reaction to the fear of a potential second wave of coronavirus and uncertainties related to upcoming presidential elections and the next fiscal stimulus.

But which stock is a better buy now? Let’s find out.

Latest Movements

TSLA has become a red-hot stock after registering record profits for the fifth consecutive quarter ended September 2020. The stock gained 3.3% in after-hours trading on October 21st following the release of its financial results. TSLA CEO Elon Musk withdrew the fourth tranche of moonshot award following the impressive results, making him the largest gainer at $11.80 billion in the Bloomberg Billionaires Index. Following the growing popularity of TSLA earlier this year, TSLA underwent a 5-for-1 stock split in August.

The company is currently planning to launch three new electric vehicles soon, including the Tesla Cybertruck and 2 electric cars. It is planning to expand in Indonesia to ensure a steady supply of nickel, a key component in manufacturing car batteries.

TSLA recently entered into the solar roof business, with CEO Elon musk expecting it to become the next “killer product” in 2021. Total solar deployments in the third quarter ended September 2020 more than doubled sequentially to 57 MV, while solar roof deployments tripled over this period.

TSLA is planning to invest up to $12 billion in electric vehicles and battery factories over the next two years, with manufacturing facilities in three continents. The company raised $4.97 billion through an at-the-market stock offering in September to fund its capital-intensive projects soon.

Moreover, TSLA is reportedly planning to launch its products in India in 2021. With a huge population and thereby a market base, this expansion is expected to ramp up the profits for the company. Also, CleanSpark software and services company recently partnered with TSLA to use its batteries for a Microgrid project in South America.

NKLA went public on June 4th through a reverse merger with a blank check company Vector IQ. It is currently constructing its manufacturing facilities in Coolidge and Arizona, following which production should begin. The company partnered with IVECO (owned by CNH Industrial) for a $250 million capital infusion in exchange for an approximately 7.11% stake. This should allow NKLA to become a leading Original Equipment Manufacturer (OEM) in the future.

On September 8th, NKLA entered into a strategic partnership agreement with General Motors Company (GM) for $2 billion in exchange for an 11% equity stake. This deal is expected to help NKLA cut down approximately $5 billion in costs over the next 10 years. Earlier this year, NKLA announced the sale of 23.90 million shares following an exercise of the warrant.

However, following some fraudulent allegations against CEO and founder Trevor Milton, he stepped down in September.

Recent Financial Results

TSLA reported impressive results for the third quarter ended in September 2020, surpassing analyst expectations. Its EV deliveries increased 7% year-over-year (subject to operating lease accounting) over this period. Revenue increased 39% year-over-year to $8.77 billion, while gross profit rose 73% from the same period last year to $2.06 billion. Its net income and EPS rose 131% and 69%, respectively. TSLA’s EPS for this period beat the consensus estimate by 33.3%.

NKLA generated $36,000 in solar revenues in the second quarter ended in June 2020. However, since solar installation projects are not related to the company’s primary operations, these are expected to be discontinued soon. Its German manufacturing facility Iveco’s Ulm is currently under construction and is ex expected to produce 10,000 units per year from the fourth quarter of 2021. NKLA is also building a production unit in Arizona, which is expected to deliver 30,000 trucks by the fourth quarter of 2021.

Thus, TSLA is in an advantageous position here.

Past and Expected Financial Performance

TSLA’s revenue and EBITDA increased by 15.4% and 84.6% year-over-year, respectively. Analysts estimate TSLA’s EPS to rise 114.6% in the current quarter, 5,650% in the current year, and 68.3% next year. Furthermore, the company has an impressive earnings surprise history, as it beat the street EPS estimates in each of the trailing four quarters. The consensus revenue estimate indicates a 35.7% growth in the current quarter, 25.6% in the current year, and 44.7% next year.

NKLA is currently in the process of building infrastructure for its manufacturing facilities. Production of hydrogen-powered trucks is expected to begin by 2021, with 2,500 orders already in place. The company has announced plans to begin on-road testing in 2022, and thereby, begin bulk production by 2023. Its revenue increased 178.6% year-over-year, while EBITDA grew 19.6% over the same period.

Analysts expect NKLA’s EPS to rise 8% next year, and at a rate of 21% per annum over the next five years. The consensus revenue estimate of $78.90 million for the full-year 2021 indicates a 56,257.1% surge year-over-year.

Hence, NKLA has an edge over TSLA here.

Profitability

TSLA’s trailing 12-month revenue is 6,404.55 times what NKLA generates. However, NKLA is more profitable with a gross margin of 41.6% versus TSLA’s 21.14%.

Nonetheless, TSLA’s ROE and free leveraged cash flow margin of 5.6% and 8.4% compare favorably with NKLA’s negative values.

Valuation

In terms of trailing 12-month price/sales, NKLA is currently trading at 3,074.21x, 24,202.1% more expensive than TSLA, which is currently trading at 12.65x. NKLA is also more expensive in terms of EV/Sales (14,194.45x versus 13.13x).

However, TSLA’s Price/ Book ratio of 22.95x is 206% higher than NKLA’s 7.5x.

Thus, TSLA is a more affordable stock here.

POWR Ratings

While TSLA is rated “Neutral” in our proprietary POWR Ratings system, NKLA is rated “Sell”. Here’s how the four components of overall POWR Rating are graded for both these stocks:

TSLA has a “C” for Trade Grade, Buy & Hold Grade and Peer Grade, and “B” for Industry Rank. It is currently ranked #11 out of 29 stocks in the Auto & Vehicle Manufacturers industry.

NKLA holds an “F” for Trade Grade and Buy & Hold Grade, “D” for Peer Grade, and “B” for Industry Rank. It is currently ranked #20 in the same industry.

The Winner

While TSLA is a well-established company dominating the EV industry with its assortment of electric cars, there are many doubts about NKLA. Some investors feel that NKLA can outperform TSLA when its products hit the market in 1-2 years, but some also believe that the company won’t be able to execute its vision especially given its recent stumbles.

However, this is purely speculative, as no concrete evidence regarding the performance of NKLA Badger Cybertruck is available yet. Also, given the fact that former CEO Trevor Milton exaggerated the time frame on which the company was operating, as well as the proprietary technology used, betting on this company is extremely risky. The company’s recent price performance echoes this sentiment, as the stock lost 80% since hitting its 52-week high in June.

TSLA, on the other hand, is fully equipped to retain its position as the leading EV manufacturer in the upcoming months, given its impressive financial performance, and ongoing expansion projects. Its vehicles are extremely well-perceived in the market, given their impressive efficiency rates and safety standards. The company has already penetrated the Chinese EV market — the largest market in the world and is expanding to other emerging countries such as India with a huge potential user base. These efforts should uplift their financials further. All these factors combined make TSLA a better investment choice, but it would be wise to wait for a better entry point.  

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TSLA shares were trading at $395.00 per share on Monday afternoon, up $6.96 (+1.79%). Year-to-date, TSLA has gained 372.12%, versus a 3.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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