Nikola stock: short interest, falling wedge, points to a short squeeze

Nikola (NKLA) stock price continued its sell-off even after the company published encouraging financial results and the Federal Reserve pointed to potential rate cuts in September. It has crashed by over 22% in the last 30 days, bringing the year-to-date losses to 71% and its market cap to $379 million. 

Nikola is making progress

Nikola’s recent results showed that the company was making progress as it seeks to become a leader in the hydrogen truck industry.

The firm has continued to manufacture and deliver trucks to customers, invest in the hydrogen infrastructure, and also receive carbon sales.

It shipped 77 trucks in the third quarter and 120 of them in the first half of the year. These are notable numbers for a company that just started selling its hydrogen vehicles. It expects to deliver between 300 and 350 trucks this year.

For the quarter, the company’s revenue came in at $31 million, higher than the $15 million it made in the same period last year. As expected, Nikola lost money for each truck it sold, which explains why its gross loss soared to $54 million.  Analysts expect that its annual revenue will be $133 million followed by $415 million next year.

Its total net loss narrowed to $133 million from $217 million, and the company is not expected to break even any time soon. Its net loss per share is expected to be 10.2 cents this year followed by 7.68 cents next year.  In most cases, automakers like Rivian, Lucid Motors, and Nio take a few years before turning a profit. 

Major challenges remain

Nikola has made a lot of progress, which is commendable. However, the company faces substantial challenges that will impact its stock performance over time.

First, Nikola has a balance sheet problem and will need to raise cash again. It ended the quarter with $256 million in unrestricted cash, meaning that it needs to find a way to improve its cash position.

Nikola needs money for payroll, continued research and development (R&D), and expanding its HYLA program. HYLA is a service where Nikola offers modular hydrogen filling stations for companies in its ecosystem. The company hopes to have 14 fueling stations in North America by the end of the year.

Just recently, Nikola said that it would sell up to $160 million senior notes that are convertible into stocks. The net proceeds of the first tranche of the fundraising will be $74.3 million. 

The reality, however, is that this is not the last time that Nikola is diluting its shareholders because of its cash burn. Over the years, the number of Nikola’s outstanding shares have risen to over 48.47 million from less than 1 million a few years ago. 

The second issue for Nikola is that it is still in the testing phase, where companies are experimenting with these hydrogen trucks. In the earnings call, Tom Okray, the CFO said:

“No one does a demo and says, I’m going to buy 500 trucks. They do a demo, they say, give me 5 or 10, and then they know they have vouchers and they’re cycling vouchers in California or trying different routes in other parts of the country.”

As such, there is a risk that some of them will opt to continue with their diesel trucks since running hydrogen trucks is costly. In its most recent quarter, the company noted that the average sale price rose by $7,000 to $381,000 while the average cost of a diesel truck goes for less than $300,000.

Additionally, the company may struggle to onboard fleets in its ecosystem because of fuel costs. In most cases, the average cost of diesel ranges between $3 to $5 per gallon while hydrogen costs between $10 to $15 per kilogram.

In most cases, it is estimated that a diesel truck costs about 57 cents a mile while a hydrogen truck costs $1.33 a mile. As a result, since fleets are low-margin businesses, many fleets will wait to buy these trucks.

Nikola stock price analysis

As mentioned, Nikola faces major challenges ahead and the stock may continue falling as it has done in the past. 

Nonetheless, it has formed a falling wedge pattern, which is shown in red. In most cases, this is one of the most bullish patterns in the market. Nikola is also highly shorted with a short interest of almost 20%. 

Therefore, there is a likelihood that the stock will go through a short squeeze in the coming weeks, meaning that shorting it is risky.