Nikola Q2 Earnings Preview: Is NKLA Stock Worth the Risk Near Record Lows?

While “record highs” were normal for broader markets in the first half of 2024, the reverse seems to be true for almost all of the startup green energy companies, which have regularly fallen to fresh lows. Nikola (NKLA) perhaps deserves a special mention, and will feature prominently if someday a post mortem of the electric vehicle (EV) bubble is written.

As one of the first green energy companies to capitalize on the special purpose acquisition company (SPAC) boom of 2020, Nikola became a flag bearer of the renewable energy euphoria - just as GameStop (GME) was for the meme stock mania.

At its peak in 2020, Nikola’s market cap surpassed that of Ford Motor (F) – which was possibly the first warning about an impending bubble in the EV industry, as Nikola hadn’t even started delivering its vehicles by then.

Nikola stock has been in a freefall since, and now has a market cap of under $350 million. The company is set to release its Q2 earnings on Friday. Here’s what markets expect from the report, and whether NKLA stock is worth the risk.

Nikola Q2 Earnings Preview

Analysts expect Nikola to report revenues of $24.6 million in the June quarter, which is 60.5% higher than the corresponding quarter last year. The company sold 72 Class 8 Nikola hydrogen fuel cell trucks to wholesale customers in Q2, which was above the high end of its guidance.

Consensus estimates call for the company to report a net loss of $120.6 million in Q2 – a YoY rise of 13.4%. Startup green energy companies reporting losses is hardly news, and most have been reporting massive losses and cash burn. This has meant approaching capital markets to raise cash – something Nikola has done quite frequently.

Nikola has been selling shares in a frenzy, which led to a steep rise in its outstanding share count. If and when Nikola starts churning out a profit, these earnings will be divided among the much bigger share count, thereby pulling down the per-share earnings.

NKLA Is Looking to Spur Volumes

But then, generating profits is hardly the first thing on Nikola management’s mind. The team is battling for survival, and completed a reverse stock split in June to meet the minimum exchange listing requirements. In fact, management has indicated that it is willing to compromise on pricing to spur initial volumes. 

During Nikola’s Q1 2024 earnings call, CFO Tom Okray emphasized, “profitability will not be where we want it to be until we can build scale. Simply put, it is not practical to optimize our cost structure without a meaningful level of volume.”

So, while Tesla (TSLA) - with its industry-leading margins - had the luxury to prioritize volumes over margins, unfortunately, Nikola – with its perennial losses and weak balance sheet – is hard-pressed, and doesn’t have the privilege of a Tesla.

NKLA Stock Forecast

Nikola is actively covered by only 5 analysts, and only 1 of them rates it as a “Strong Buy,” while 4 call it a “Hold.” Its mean target price of $18.01, however, is over 145% higher than Wednesday’s closing prices.

To be sure, Nikola has revamped its business and is focusing on commercializing its hydrogen fuel truck while also building hydrogen infrastructure in North America under the Hyla brand, which it can monetize later if the hydrogen industry gains traction. The company has a first-mover advantage in green Class 8 trucks in North America, and can be a multibagger if it can successfully sell its trucks at scale.

Key Risks Nikola Investors Should Watch Out For

That said, there are several risks that Nikola investors should watch out for, beginning with execution. The company has to successfully sell its hydrogen fuel trucks, a technology that some, including Elon Musk, are not too optimistic about.

The second risk for Nikola could be the possibility of Donald Trump winning the November election, given his proposed energy policies that prioritize the fossil fuel industry over green energy. That said, irrespective of who sits in the White House, the transition to cleaner fuel is an ongoing process, even as policy actions could spur or slacken that pivot.

The third risk for Nikola investors is its weak balance sheet and recurring cash burn, which will keep the bankruptcy sword hanging over the company. Finally, given the recent spurt of volatility in markets, financially weak companies might not find favor with investors, given the bargain prices that they can get in quality shares.

Overall, while Nikola might not appear too expensive at a next 12-month price-to-sales multiple of 1.66x, I would still steer clear of the troubled company, even as the risk-reward now looks favorable for investors with a high risk appetite.