2024 is Nikola's Year. Here's Why.

In this newsletter issue we share our thesis and price target for Nikola (NKLA) in 2024.

In this newsletter issue we share our full thesis on Nikola for 2024.

Our price target is $3 by the end of this year though we think the stock could go a lot higher.

With the stock at $0.70, that’s a gain of over 300% in one year. We believe this is a very feasible price target as Nikola mounts a powerful comeback story and positively surprises an overly pessimistic market with incrementally growing truck sales of its recently launched and first-to-market hydrogen fuel cell truck.

High level questions we’ll answer:

1. What is Nikola’s history and why is the market so pessimistic?

2. Why does Nikola have the foundations to mount a powerful comeback story?

3. What’s the case for hydrogen over batteries?

4. Why are we bullish now? What’s the crux of the bull case?

5. What are the remaining risks?

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💡 What is Nikola’s history and why is the market so historically pessimistic?

It’d be remiss for any comprehensive analysis of Nikola to not mention its tumultuous history.

✅ You can skip this section if you just want the bull thesis.

Nikola is the brainchild of Trevor Milton. He founded the company in 2014 with hydrogen-powered trucks as the core vision.

Milton’s entrepreneurial history, grand vision, and a larger-than-life personality attracted many investors looking to invest in a post-fossil-fuel future.

As such, the company grew through incremental investment rounds and the minting of major industry partnerships like Bosch and Anheuser-Busch until it was ready (not really) for the public markets in 2020. To make up for its shortcomings (no product in production, no revenue), the company goes public through a SPAC.

This SPAC deal was largely engineered by Steve Girsky, a seasoned automotive industry executive with illustrious job titles like Managing Director at Morgan Stanley and President of GM Europe on his resume.

With the deal complete, Nikola became a public company at the onset of the pandemic bull market, just as the Fed started inundating the economy with money. The timing couldn’t have been better and the free flow of excess money in the economy helped pushed the stock from $10 to over $90.

Girsky stayed on as a member of the board.

Milton’s ego inflated at the same pace as Nikola’s stock price and he became a rambunctious public figure, constantly going on TV and social media to joust with naysayers and extol his company.

In many ways, he was trying to be Elon Musk 2.0. The close relationship of both company’s names to the mythical 20th century inventor Nikola Tesla made the connection hard to miss.

Unfortunately, Milton’s Musk act was crude and garish and he quickly attracted a large crowd of detractors.

This eventually resulted in a devastating short seller report that was released just as Nikola’s stock was plummeting from its stratospheric $90 peak. The report not only pushed the case of Nikola being wantonly overvalued, but also accused the company and Milton of fraud.

This was the beginning of the end of Milton’s illustrious career at Nikola and the stock price crashed along with his career.

Long story short, Milton was eventually found guilty of fraud and sentenced to 4 years in prison. As Milton’s legal battles unraveled, Nikola’s stock price careened downwards as the market soured on a company that lost its loud-mouthed visionary leader while the Fed pulled back on the easy money it doled out during the pandemic. It was a perfect storm that pushed the stock down to a dismal $0.50 at its nadir.

Sounds bad? It undeniably is.

But with markets, a seemingly dire situation where a company is priced for failure can quickly turn into significant asymmetrical opportunity if the company surprises the market and turns the ship around.

We think Nikola has all the ingredients of a surprise turnaround story, and it’s ready to prove the market wrong this year.

Here’s the inevitable disclaimer: we provide insights and ideas, not investment advice.

💡 Why does Nikola have the foundations to mount a powerful comeback story?

During the ill-fated OpenAI boardroom coup late last year, OpenAI’s employees tweeted a mantra to support temporarily-ousted CEO Sam Altman:

“OpenAI is nothing without its people”

This statement is true for all companies but is deeply relevant to Nikola’s beleaguered journey as a company post-Milton.

The company endured incessant criticism and wave upon wave of short selling as it completed a giant manufacturing plant in Arizona in 2021. At the same time, it successfully completed design and validation of the Tre BEV.

The Tre BEV started mass production in 2022 with the fledgling company selling hundreds of trucks throughout the year.

In late 2023, the company started mass production of a hydrogen fuel cell variant of the Tre BEV called the Tre FCEV.

This made Nikola the first company to launch a production hydrogen fuel cell truck in the US!

All the while, Nikola’s stock price careened downwards. How did the company accomplish such herculean achievements in the face of unyielding pessimism from the public market?

The answer is its people.

What Nikola has achieved over the past 3 years is nothing short of impressive given the circumstances and it wouldn’t be possible without the indomitable will of a group of people that are determined to prove the world wrong.

“The resilience of the Nikola team is unmatched. We have endured plenty and will continue driving forward in our mission to decarbonize heavy duty commercial transportation. We have government regulation, and incentive tailwinds at our back, the first commercially available hydrogen fuel cell electric truck in North America and the team to execute.” - Steve Girsky in the Q3 earnings call

💡 What’s the case for hydrogen over batteries?

While the past decade has proven batteries as a viable zero-emission energy source for small personal vehicles like cars and motorcycles, they’re ineffective for heavy industry.

Battery charge times are too long. The material is too expensive and heavy. And they don’t hold charge in cold weather.

For trucks that need to haul upwards of 40,000 pounds across the country in a wide range of temperatures, batteries are nowhere close to being viable.

Hydrogen, on the other hand, serves as the best zero-emission energy source for heavy industry. Hydrogen is energy-dense, fast to fuel, and maintains its effectiveness in cold weather.

Hydrogen is a much better fuel source than batteries in cold temperatures.

In addition, just like battery electricity, hydrogen fuel can be cleanly produced decentrally at fueling stations via solar panels.

The main problems with hydrogen are storage and transportation but hydrogen infrastructure technology is advancing at a breakneck pace at the same time as the proliferation of government incentives for the novel energy source and hydrogen is currently an economically viable energy source with the help of government subsidies.

Costs will only fall over time and it’s inevitable that hydrogen will be a cost-competitive fuel source, sans government support, within a few years.

💡 Why are we bullish now? What’s the crux of the bull case?

With the Tre Fuel Cell variant (Tre FCEV) launched and in production, and Steve Girsky at the helm, we think that Nikola is set to have a massive comeback year in 2024.

I won’t bore you with superfluous words, let’s cut straight to the chase:

1. High demand for a first-to-market production hydrogen fuel cell truck:

   1. Since production launch in October, Nikola produced 42 FCEVs and sold 35 to customers in the US and Canada.

   2. Both the Nikola Tre FCEV and BEV are eligible for the California HVIP program where prospective buyers can apply for vouchers that cover $240,000 to $288,000 of the purchase cost per truck. The HVIP program publishes truck voucher application statistics at the end of each month and this is a good way to gauge demand for the FCEV and BEV. At the end of December, there were 354 FCEV voucher applications and 96 BEV voucher applications.

2. Major conviction from the Central Bank of Norway:

   1. The Central Bank of Norway, Norges Bank, significantly increased its stake in Nikola in Q4 2023. Their holdings tripled from 33,581,371 to 107,033,812 shares which means they now own 9.25% of the company!

   2. The bank’s internal rules prevent it from owning more than 10% of any company so it has basically maxed out its investment in Nikola. That’s serious conviction.

   3. Moreover, Norges Bank's 10% stake in Nikola is its largest investment in its energy portfolio by % of company owned. The bank’s next largest energy investment by this measure doesn’t even come close, reaching just 4.93% for Malaysia's Dayang Enterprises Holdings.

      

      Norges Bank’s energy sector portfolio, sorted by ownership % descending. This list hasn’t been updated to reflect the new Nikola investment.

3. Steve Girsky is the best CEO for the company right now:

   1. Long and impressive career in both finance and the automotive industry.

   2. On his career in GM: “Girsky served in a number of capacities at General Motors from November 2009 until July 2014, including vice chairman. He served as chairman of the Adam Opel AG Supervisory Board and was president of GM Europe for a period of time. He was a special advisor to the CEO and CFO of General Motors Corporation from August 2005 to June 2006.”

   3. On his career in finance: “In total, Steve has 25 years of automotive experience, including serving as managing director at Morgan Stanley and as senior analyst of the Morgan Stanley Global Automotive and Auto Parts Research Team. While at Morgan Stanley, Steve was ranked the No. 1 automotive and auto parts analyst by Institutional Investor’s “All-American Research Team” annual investor poll for 14 consecutive years. His automotive and auto parts team ranked No. 1 in the Greenwich Associates poll for 14 consecutive years as well.”

   4. Bringing Nikola public was Girsky’s idea. Nikola was one of the first successful SPACs in the pandemic bull market and the stock’s initial explosive success on the public market ushered in a massive wave of SPACs.

   5. Girsky’s extensive 20-year career in finance means that he knows how to deftly navigate financial markets.

4. Favorable government incentives for hydrogen:

   1. The first two major markets that Nikola is targeting is California and Canada, largely because of the favorable government incentives for zero emission trucks.

   2. As of this month, California has banned new fossil fuel trucks in railyards and ports while offering heavy discounts for zero emission truck purchases through the HVIP program.

   3. Canada also offers heavy discounts for zero emission truck purchases (up to $350,000 CAD per truck) and plans to ban sales of new fossil fuel cars and trucks by 2035. Hydrogen trucks are also much better suited for Canadian winters.

   4. US Federal incentives:

      1. Biden’s Investing in America agenda plans to drive $50 billion in “public-private sector investment to jump-start America’s Clean Hydrogen Economy”. In October 2023, the US Department of Energy committed $7 billion to launch 7 major clean hydrogen hubs in the country.

      2. Clean Hydrogen Production Tax Credit creates a new 10-year incentive for clean hydrogen of up to $3.00/kilogram. This is stackable with a California hydrogen tax credit of up to $2.00/kilogram.

5. Nikola is well capitalized:

   1. In the Q3 earnings call, the company said it has access to $705.8 million in cash and capital and given its current rate of cash burn, has 12 months of runway on hand. This meets their persistent runway goal and they are constantly increasing efficiency to extend their runway.

   2. The $705.8 million in capital is dependent on the stock price so there’s tremendous pressure on management to increase the stock price this year to at least maintain, if not significantly increase, this capital.

   3. Nikola has spending under control. From the Q3 earnings call, “quarterly cash used came in at $111.9 million well below our target of $120 million, reflecting a 25% improvement from Q2 cash used of $148.3 million.”

6. Short squeeze powder keg:

   1. The market is overly pessimistic of Nikola and pricing the company for failure, while the company is well capitalized to achieve its goals and stubbornly executing towards its hydrogen vision.

   2. High short interest: 17.65% of outstanding shares.

7. Upcoming positive catalysts will put tremendous pressure on shorts:

   1. January California HVIP voucher numbers come out this week

   2. New FCEV orders being announced by Nikola

      1. Earlier this month, IMC, Memphis area's largest intermodal logistics firm, announced an order for 50 Nikola FCEVs.

      2. Rumors of orders from other major customers that could be announced leading up to the Q4 earnings call on February 22nd.

   3. The BEV recall last year could be resolved soon. The recall was triggered by faulty batteries in all 209 of the BEVs sold by the company and it’s now looking for replacement batteries before returning the trucks to fleet operators. Girsky expects resolution of the recall to happen sometime in Q1.

8. Europe urgently needs hydrogen as an energy source:

   1. Europe is cut off from its primary fossil fuel supplier, Russia, and urgently needs a dense and clean alternative energy source to power its heavy industry. Given Europe's predominantly cold winter climates, hydrogen is the best clean alternative energy source.

💡 What are the remaining risks?

1. Tre BEV recall:

   1. Nikola recalled 209 BEVs last year because of fire risk from faulty batteries. The company is currently trying to find replacement batteries for the recalled BEVs.

   2. Girsky expects this situation to resolve by the end of Q1.

   3. We think this is the greatest risk to the company right now. So far, they’ve been able to absorb the extra costs from the recall but it’s unclear how badly the financial situation deteriorates if they need to extend the recall or can’t find a reasonably priced alternative battery supply.

   4. On the flip side, the resolution of this issue will be a big boon for the company and the stock. It bodes well that orders were placed for 47 BEVs in November despite the recall.

2. An unexpected fault with the FCEV:

   1. The company's success hinges entirely on the success of the FCEV and it can’t afford another costly recall if the Tre FCEV also experiences an unexpected fault.

   2. The good news is that this risk is a lot smaller for the FCEV. While the BEV’s batteries were supplied by a small startup called Romeo Power, the FCEV’s fuel cells are supplied by Bosch, a longstanding German multinational engineering company that no doubt has superior design, engineering, and quality control capabilities over a startup.

3. Stock dilution:

   1. There’s currently 1.16 billion shares outstanding with 1.6 billion shares approved. This means the company has been pre-approved to dilute investors by ~38% at any time, and they could always file to increase the number of approved shares if the capital situation deteriorates.

   2. We think that this is a minor risk.

💡 How did we reach our $3 price target?

Disclaimer again: we provide insights and ideas, not investment advice.

Nikola expects to sell ~1,000 trucks this year.

Assuming they resolve the BEV recall in a timely manner and reach 70% of their sales goal, that’s $280,000,000 in revenue. Assuming a conservative 10 PS (price-to-sales) ratio, that’s a $2.8B valuation.

At a $2.8B valuation, if the outstanding share count doesn’t increase, then the share price would be $2.40. If the remaining approved shares are issued this year (1.16B → 1.6B), then the share price would by $1.75.

Given the market’s pessimism and the significant opportunities for the company to positively surprise the market this year, we think this gives the stock the extra juice to get to $3 or higher.

“I think our prospects are great, I think 2024 is going to be the best year in the history of the company.” - Steve Girsky in an interview with FreightWave on December 26th.