Nikola Overview
We wrote about Nikola Corporation (NASDAQ:NKLA) back in January of this year, when we recommended that options strategies (primarily put selling) were the best way to play the high levels of uncertainty surrounding Nikola’s future. Back in January this year, we recommended the sale of the stock’s $2 put options prior to the announcement of the company’s fourth-quarter earnings.
Given that the market didn’t take very well to the company’s Q4 results for 2022 as well as Nikola’s subsequent first-quarter earnings miss announced in May this year, shares actually ended up dropping below $0.55 a share by early June. The thing is, though, even with this significant drawdown, the option seller who was strategic with his defensive rolling strategy would have consistently been able to reduce his cost-basis due to Nikola’s high levels of both option liquidity as well as implied volatility. On the other hand, the long stockholder’s cost-basis would have remained the same where this position would be showing a sizable paper loss only for the very strong rally we have seen over the past two months or so.
Now, though, with Nikola Corporation Q2 earnings numbers expected to be announced later this week (pre-market August 4th), we believe it is best to remain on the sidelines at present for reasons we discuss below.
NKLA Stock Rally Now Meeting Strong Technical Resistance
In fact, as we see below, Nikola’s rally over the past 9 weeks or so has been breathtaking, to say the least. The rally has taken place on extremely strong buying volume with the announcement of job cuts in June, the BayoTech hydrogen truck partnership in July, and the recent J.B Hunt order (13 trucks in total including battery-electric & hydrogen fuel cell) primarily responsible for the significant up-move. Recent bullish events, along with Nikola’s upcoming third-quarter earnings numbers (-$0.25 is the bottom-line EPS number predicted), have shares now trading above $3 a share. Therefore the question is whether the market is prompting a major near-term up-move here, or will the upcoming Q2 print disappoint investors and result in a “sell the news” event (lower prices).
One thing is for sure: we estimate that we would need to see a strong earnings Q2 beat as well as much improved forward expectations if a breakout is on the cards. As we see below, shares are now coming up against significant long-term multi-year resistance where only a technical breakout will result in Nikola’s 10-week moving average being able to cross above the corresponding 40-week average.
Nikola Intermediate Technical Chart (Stockcharts.com)
Profitability Trends Improving
From a longevity standpoint, it will be interesting to see how the likes of the recent BayoTech & J.B Hunt orders will affect Nikola’s financials over time. This is where the real uncertainty lies, in that Nikola from practically day one has been up against the clock with respect to getting its financials in order. The company’s cash-flow burn remains excessive ($240 million in Q1), so it will be interesting to see if management can drive this number lower in upcoming quarters.
Nikola’s cash-flow burn needs to come down significantly, which essentially will buy the company more time (concerning its road to profitability) and keep sustained dilution at bay. In the first quarter this year, for example, the cost of Nikola’s revenues of $44 million (off a higher revenue count of $11.1 million) came in well below Q4’s $52.3 million. Furthermore, SG&A costs of $53.7 million in Q1 came in almost $27 million below the corresponding line item for Q4 last year. These trends are really encouraging regarding profitability, where management is aiming to report positive EBITDA by 2025.
Selling more trucks on the front end (thereby achieving improved economies of scale) and the pivot to the more streamlined build-to-order strategy for battery electric is bound to act as a positive tailwind for margins going forward. Furthermore, investors should also remember that hydrogen fuel cell trucks are expected to carry much stronger gross margins compared to battery electric. Moreover, the frontloading of R&D spending in Q1 this year and the expected tapering off of capex spending in due time all point to stronger margins and lower cash-flow burn.
Conclusion
To sum up, Nikola Corporation continues to realign its cost structure in order to remain as competitive as possible. Through its hydrogen refueling business and laser-type focus concerning the rollout of the hydrogen fuel cell truck in the U.S., management believes it remains well ahead of the competition in this industry. Let’s see if Nikola Corporation Q2 numbers can surprise to the upside. We look forward to continued coverage.
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