Nikola : A genuine challenger to Tesla?
Nikola Tre, Source : Nikola Corp.
Nikola, a designer and manufacturer of futuristic electric powered automobiles has recently been thrust into the public spotlight as a consequence of the incredible performance of its share price. Nikola went public via an unconventional ‘backdoor listing’ approach on 4th June following a reverse merger process. Within the first 3 days of trading the share price had gained 104%, at one-point peaking as high as $93, giving them a greater market capitalisation than Ford. This is in spite of the fact Nikola are yet to generate a single dollar of revenue. With their ambitious plans for battery-electric and hydrogen fuel cell powered trucks Nikola are a company for the future, and one many view as a rival to Tesla – but are their plans realistic and can they secure the sales to represent the market value their share price implies?
Nikola’s core vision centres around the development and production of battery-electric vehicles (BEV) and hydrogen fuel-cell electric vehicles (FCEV). They aim to enter the truck and semi-truck market, where there is currently a lack of penetration from electricals ascribed to difficulties in fitting batteries to heavy goods vehicles (HVG). The market for electric powered vehicles is touted as having lucrative potential – with corporations placing greater emphasis on environmental, social and governance (ESG) criteria there is growing demand for emission free electric vehicles. This has led to 14,000 pre-orders being places with Nikola, representing a potential $10bn in revenue, although it is important to note that currently none of these pre-orders are guarantees of an actual purchase and Nikola are currently attempting to negotiate to convert pre-orders into binding purchase contracts.
According to Nikola’s claims they will begin generating revenue in 2021 with the release of the Nikola Tre Class 8 BEV truck, and this will be followed by the hydrogen powered Nikola Two Class FCEV truck in 2023. The hydrogen powered truck is set to come alongside a hydrogen fuelling network across North America which will be the largest in the world. As well as the Class 8 long-haul trucks Nikola is also targeting the consumer market with the announcement of the Badger pick-up truck last week, powered by both an electric battery and a hydrogen fuel cell. There is great anticipation around the launch of the Badger, although it is still over 2 years from production and its manufacturing is subject to a yet to be announced partnership.
Nikola Badger, Source: Nikola Corp.
The manner in which Nikola went public was an unconventional one. They opted for a ‘backdoor’ approach in entering the public market through a merger with a special purpose acquisition company (SPAC). A SPAC is an acquisition vehicle that is a shell company specifically created and listed on public markets for the purpose of a future merger with a private company to take it public without having to go through the IPO process. On the 3rd June Nikola completed its merger with VectoIQ and went public on Nasdaq on June 4th under the ticker NKLA. Through the reverse merger process Nikola raised $760m, capital that will be crucial in enabling the production of its electrically powered cars and implementation of a hydrogen fuelling infrastructure.
CEO Trevor Milton has also planned the development of a cutting-edge manufacturing plant in Arizona that extensive funds will be required for. On competition of the listing Milton said Nikola were “thrilled to complete the Nasdaq listing and be a part of the ESG investment world” he appears particularly roseate about the potential of the company with claims they “can literally change the world”. The deal with VectoIQ implied a value for Nikola of $3.3bn, however sharp rises in share price led to Nikola reaching a market capitalisation of $12bn on the first day of trading.
Prior to listing Nikola had raised $500m in private capital with notable investors including ValueAct and the Italian magnate Agnelli family. Investment from the Agnelli family via CNH industrial includes a deal for a 50-50 European project with the objective of beginning the production of BEV trucks in Germany.
Since listing Nikola has seen an extraordinary performance in its share price, with a 104% surge over the first 3 days of listing taking it to a market capitalisation of $26bn. At one it peaked at a $30bn value with a share price of $93. It has since fallen from this peak but on the 19th June closed the trading week at $66, giving a market capitalisation of just under $23.8bn. This places it in line with Ford who closed the week with a market capitalisation of $24.8bn, despite Ford seeing revenues of $156bn in 2019 and Nikola still months, potentially years away from making their first sale. Nikola has also become more valuable than established household names in the industry such as Hyundai and Fiat Chrysler who saw market capitalisations of $20.7bn and $14.7bn at the close of the trading week.
A catalyst for the strong performance was Milton’s announcement of the consumer targeted pick-up truck coined ‘Badger’ on the 8th June, with pre orders opening on the 29th June. This offers a unique type of competition for the industry, where Elon Musk’s Tesla has begun to disrupt the car market through their nascent model electric cars the pick-up truck market has remained unpenetrated. Milton has set the ambitious target of becoming the leading producer of pick-up trucks in the US, which is currently the most profitable segment of the US automobile market.
It remains to be seen whether Nikola will be able to get anywhere near this goal – although they intend to bring an innovative product to the market and if they can successfully take advantage of a more environmentally conscious consumer base then it may be possible, and this anticipation was reflected in the spike in share price on the break of the news.
With Nikola being a developer of an ultramodern product, with an outspoken CEO and ambitious long-term plans comparisons are frequently drawn with Tesla. Both firms are named after Serbian-American inventor Nikola Tesla who made revolutionary contributions to the design of the modern electricity system. Tesla have also enjoyed a soaring stock price – their market capitalisation has increased by 375% over the last 12 months, giving the firm a value of $185.5bn at market close on 19th June, recently eclipsing Toyota to become the world’s most valuable automaker.
The firms are now set to go head-to-head in competing in the electrified truck market. Milton and Musk have already engaged in a war of words with Milton stressing Nikola were vastly different from Tesla and claiming if Tesla had adopted a more orthodox dealer network they could be worth a trillion dollars. Musk has lambasted Nikola’s hydrogen strategy calling it “staggeringly dumb” and suggesting using hydrogen to power vehicles is “mind-bogglingly stupid”.
CEO Trevor Milton, Source: Forbes
This rivalry is likely to progress beyond a mere war of words with a leaked internal memo from Musk calling for Tesla to “go all out and bring the Tesla Semi to volume production” which will pit them as a direct competitor to Nikola. With increased focus on ESG these low emission trucks present an opportunity for firms who rely on a large transport network to cut their carbon footprint; hence this market will be a significant one in years to come.
The major differentiating factor between the firms is Nikola’s use of hydrogen fuel – whilst Tesla remain committed to the BEV model Nikola are looking to develop the hydrogen powered FCEV model. The battle for superiority will come down to whether Musk’s criticisms of hydrogen fuel are shown to be true or not, should he be proved right and Nikola fail to develop an efficient hydrogen powering network Tesla will likely become the dominant player but if Milton can successfully prove Musk wrong then Nikola will have a unique product that could outcompete the standard BEV truck.
Nikola projections predict they will earn their first $1bn of revenue in 2023 and will hit full production of 30,000 FCEV and 15,000 BEV trucks in 2027. Production is set to begin in 2021 and will be ramped up every year until full production is reached. A recent report by Bloomberg suggests that this is an overestimation, with Bloomberg estimates placing FCEV truck sales sub 10,000 until 2030 and citing a failure to compete on costs that will mean 90% of HGV will still be powered by diesel in 2040.
Doubts of the viability of hydrogen fuel will persist as will concerns over the lack of any track record for Nikola, however, the significant investor backing with many touting hydrogen as the fuel of the future and excitement around the announcement of their products show there is definitely potential. The future success of Nikola and its ability to compete with Tesla will largely depend upon whether they can develop hydrogen as a cost-efficient fuel, if they succeed then they are primed to become a dominant player in the industry.