Nikola Stock Keeps Falling to New Lows, but Is It Cheap Enough to Buy Yet?

Earlier this week, Nikola (NKLA) stock fell to a new record low. While the electric vehicle (EV) stock has since recovered slightly, it is still down almost 80% for the year. The stock has been falling to newer lows throughout 2024 - but is NKLA a “cheap stock” at these levels? We’ll discuss in this article.

To begin with, let’s look at the difference between a low stock price and a cheap stock, as the nuanced differences between these two categories can often be confusing. When we talk about a “low stock price,” it's in reference to the absolute share price, and not a measure of valuation. 

For instance, Nikola traded at lower absolute price levels earlier this year, ahead of its reverse stock split.

In June, Nikola completed a 1-for-30 reverse stock split, which was the maximum ratio it could have gone for. The reverse stock split was meant to correct Nikola’s violation of Nasdaq listing rules, as its share price was consistently trading below the exchange's minimum threshold of $1.

How to Define a Cheap Stock

A stock’s “cheapness,” on the other hand, refers to its valuation. So, a cheap stock would have relatively low valuation multiples, such as the price/earnings (P/E) ratio, enterprise value (EV)/sales, and other such metrics. 

Berkshire Hathaway Class A shares (BRK.A) are a perfect example here. While its absolute stock price is the highest among all listed companies, at nearly $678,000 per share, that doesn't tell us anything about whether Berkshire's valuations are cheap or expensive.

Nikola Has Been Selling Shares Frequently to Fund Its Cash Burn

McDonald's (MCD) founder Ray Kroc famously said in 1974, “Ladies and gentlemen, I'm not in the hamburger business. My business is real estate.” For someone who has been actively following Nikola since its special purpose acquisition company (SPAC) merger in 2020, the company seems to be in the business of selling its own shares, rather than hydrogen trucks.

Nikola has raised capital in multiple tranches over the last three years, making it difficult to keep count. It now has over 50 million outstanding shares, which is more than triple the amount when it went public. Also, the company has several convertible notes which, when converted to common equity, will further bump up its outstanding share count.

Last month, the troubled company sold yet another convertible bond, raising gross proceeds of $80 million, and said that it intends to sell another $80 million worth of convertible bonds subject to shareholder approval. Nikola's stock-based compensation was $75.4 million in 2023, and while management expects stock-based compensation to fall to around $30 million in 2024, that figure is still high, and represents over 10% of its current market cap.

Nikola Has a Very Weak Balance Sheet

Nikola burns loads of cash every quarter, and in Q2 its cash burn was $150 million - similar to the corresponding quarter last year. The company had only $256 million worth of unrestricted cash at the end of June, so the August capital raise was largely expected.

The importance of cash - or rather, cash burn - for Nikola cannot be overstated, and the word cropped up 22 times during the company’s Q2 earnings call. In response to an analyst question on the cash levels that Nikola is comfortable with, CFO Tom Okray said, “ideally, as we enter next year, we would like to have enough cash where we can operate for a full fiscal year unencumbered without going into the market and just focus on chopping wood and execution.”

Another aspect worth considering is that as Nikola’s stock price has been in a freefall, its subsequent stock sales have been happening at lower prices, leading to even higher dilution. If and when Nikola starts churning out a profit, these earnings will be divided among the much bigger (and rising) share count, thereby pulling down the per-share earnings.

Meanwhile, Nikola's next 12-month price-to-sales multiple has fallen to 1.21x, which is almost the cheapest it has ever been. While its plummeting stock price has certainly played a part in pulling down Nikola's valuation, it is now finally making some revenues, which has bumped up the denominator in that equation.

All of that said, while NKLA has the first-mover advantage as the only Original Equipment Manufacturer (OEM) with Class 8 hydrogen trucks commercially available in North America, and has also started realizing revenues from sales of regulatory credits, I still find the stock too risky to bet on, despite the cheap valuations.