Nikola stock price set to jump amid FOMO: dilution risks remain

Nikola (NASDAQ: NKLA) stock price jumped by more than 20% on Tuesday as investors started embracing the FOMO attitude. The shares jumped to a high of $0.9140, the highest level since May this year. In all, the stock has bounced back by about 50% from the lowest level this year.

Is NKLA a good investment?

Nikola Motors is a company manufacturing and selling large trucks to firms in industries like deliveries and consumer staples. The company has already started selling its battery electric vehicles. However, while the truck has been quite successful, the company decided to shift its business model.

In a statement, the company has decided to focus on hydrogen-powered trucks, which have better features than battery electric ones. For one, they have a faster refueling time compared to battery trucks that take hours to charge.

Further, hydrogen is extremely light compared to battery trucks. As a result, hydrogen trucks can be used to carry more payloads and travel for longer distance. Battery trucks, such as the ones made by Tesla, can only carry lighter materials and products.

The challenge for Nikola is that hydrogen infrastructure still has a long way to go. As a result, the company has limited chances of succeeding internationally, which explains why it is focusing on the North American market. It recently sold its European business to Iveco.

Nikola is a cash incinerator

The other challenge for Nikola stock is that the company is a cash incinerator. In the most recent quarter, the company’s revenue came in at $11.1 million while the cost of revenue was over $44 million. In total, Nikola had a net loss of over $169 million. The company’s net loss in the past ten quarters came in at almost $2 billion.

Nikola’s balance sheet is also in bad shape. The company had over $136 million in the last quarter. While this is a big number, it was smaller than the $236 million it had in the December quarter and $319 million it had in the previous quarter.

Therefore, this trend means that Nikola will need additional capital even as it moves to ramp up its production. As we have seen with other electric vehicle companies like Rivian and Lucid, ramping up production can be an expensive thing. Nikola’s outstanding shares have jumped to over 475 million from 60 million in 2018.

Nikola hopes to become EBITDA profitable by 2025. To achieve that, the company will need to raise additional capital, which will lead to more dilution.

Nikola stock price forecast

Nikola chart by TradingView

In my last article on Nikola, I warned that it was extremely risky to short NKLA stock. This argument was correct since the shares have surged since then. On the daily chart, we see that the shares have found a strong bottom at $0.5420. It is attempting to move above the 50-day exponential moving average (EMA). 

I believe that Nikola Motors stock will remain under pressure in the long-term. In the short term, however, FOMO could set in and push the stock to the next key resistance point at $2.02, the lowest point in December last year.