One of the more controversial electric vehicle start-up companies on the market is Nikola (NASDAQ:NKLA).
NKLA became public through a reverse merger back in June 2020, with a SPAC called VectorIQ Holdings. Red flags popped up almost immediately ranging from a suspicious test roll out in 2020 to a controversial deal with General Motors (NYSE:GM) that was quickly debunked by short selling research company Hindenburg Research.
In that report, Hindenburg claimed that Nikola had made false or misleading claims about its battery technology, hydrogen production capabilities and other issues. The report also said that NKLA designed key components of its trucks in house, but the technology actually was licensed or bought from third parties.
History of Automobile Manufacturers
The early 20th century history of automobile manufacturing is very different than what most people think.
There were 100’s of auto companies producing all types of cars in the early stages of the internal combustion engine boom. In 1908 there were 253 car companies which dropped to 44 in 1929, still a shockingly high number. Most of those were wiped out in the Great Depression and a few were absorbed into what became the big three — General Motors, Ford (NYSE:F) and Chrysler.
It’s an incredibly tough business with massive amounts of capital requirements. Auto manufacturing doesn’t scale well like a software business does. All cars, whether electric or gasoline, are heavy pieces of equipment which takes an incredible amount of steel, plastics, glass and electronics. Not many companies can scale up for the long-haul. There are doubts even EV global leaders like Tesla (NASDAQ:TSLA) can become successful.
How Do Nikola’s Finances Look?
The company had 271.9 shares at end of Q1 2020 which ballooned to 392.5 million at end of Q1 2021and today sit around 400 million. The gives it a market cap of about $6.4 billion, quite high for a pre-revenue company with a high cash burn rate.
Cash on the balance sheet stood at $763 million in at the end of Q1 2021. Q1 2021 burn rate was approximately $75 million. If that continues throughout the year, that will give the company 2 years until needs to find additional funding sources. Production and sales may happen this year at some point, but profitability and free cash flow is many years away, certainly far greater than 2 years away.
If the capital markets stay open, then NKLA has a fighting chance to make it. But if they close like in 2008, NKLA will get a “going concern” warning like rival Lordstown Motors (NASDAQ:RIDE) did this summer.
This free money and low interest rate environment we’ve been in for almost a decade keeps many questionable and speculative business ventures afloat, often longer than it should. As Warren Buffet once said, “only when the tide goes out do you discover who’s been swimming naked”
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.