All About Nikola Motor Company’s Stock Offering
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In our recent guide to investing in fuel cell stocks, we reflected on how the hydrogen economy hasn’t quite matured and – according to Elon Musk – shouldn’t ever mature. Battery-powered vehicles seem to be working out just fine, so why reinvent the wheel? At least one company disagrees with Mr. Musk. Nikola Motor Company thinks that the killer use case for hydrogen fuel cells is semi trucking. And they may become publicly traded soon. (Nearly all of the below information was taken from the VectoIQ SEC filing, and a small portion from the Nikola Motor Company website.)
About Nikola Motor Company
Founded in 2015, Nikola Motor Company has raised over $500 million in funding so far from investors that include Bosch and the U.S. Department of Energy. Nikola is a self-described “vertically integrated zero-emissions transportation systems provider” whose core offering surrounds two types of Class 8 semi trucks.
- Battery-electric vehicle (“BEV“)
- Hydrogen fuel cell electric vehicle (“FCEV“)
BEVs and FCEVs have identical e-Axles and similar truck designs, representing significant synergies in the manufacturing process between the two. The main focus of this article is around FCEVs, which comprise a key piece of Nikola’s business model which is to offer a bundled lease, providing customers with the FCEV truck, hydrogen fuel, and maintenance for a fixed price per mile.
According to ACT Research, total cost of ownership for a diesel truck (excluding driver wages, benefits, and insurance), is typically broken down into cost of fuel (approximately 50%), purchase or lease payments on truck (approximately 22%), and repairs and maintenance (approximately 28%). By leasing an FCEV truck from Nikola, the entire cost of ownership is bundled into a single payment with per-mile granularity. (Each lease is for 7 years or 700,000 miles, whatever comes first.)
As for performance, the FCEV trucks take 10-15 minutes to charge, have a range of 500-750 miles, and come with some really cool features like a digital cockpit, regenerative braking, and torque vectoring which allows control of each wheel independently through drive-by-wire.
The reason why Nikola may succeed where others have failed is their planned network of hydrogen fueling stations.
Hydrogen Fuel Cell Fueling Stations
Historically, investing in alternative fuel vehicles represented a high risk for both original equipment manufacturers (OEMs), and customers due to the uncertainty of the fueling infrastructure. Existing fuel providers have little incentive to develop an alternative fuel infrastructure due to a lack of known demand. The inability to tackle both sides of this equation has prohibited hydrogen from reaching its potential. Nikola’s approach aims to solve “the chicken or the egg” problem.
In our previous piece on investing in fuel cell stocks, we briefly mentioned a Norwegian firm, Nel ASA, which has more than 3,500 cost efficient electrolyzers installed around the globe. Nikola has partnered with Nel ASA to build their hydrogen filling base station which is expected to have a daily production capacity of 17,637 lbs. and will be capable of supporting approximately 210 FCEV trucks per day.
The initial plan for the station rollout begins with an eight-ton pilot station accessible to the Anheuser-Busch brewery in Van Nuys, California. (Construction is expected to begin in 2021.) From there, they plan to build up to 10-12 additional stations in California. These stations will supply fuel for their launch customers that have dedicated routes in California, a state that’s offering incentives to build out hydrogen fueling infrastructure and deploy zero-emissions vehicles, including opportunities for funding along major freeway corridors. These stations are expected to be in operation by 2023 (according to Nikola’s financial projections).
Through 2024, Nikola expects to incur up to $1.0 billion in capital expenditures related to hydrogen stations. Each station is expected to take 1.5 to 2 years to complete, and the average total cost per station to be $15 to $20 million, depending on station location.
How Many Trucks Has Nikola Sold?
The answer is none. As of December 31, 2019, Nikola had reservations for 14,000 Nikola Two FCEV trucks, all of which are subject to cancellation by the customer until the customer enters into a lease agreement. (While no deposits were taken for the reservations, the majority of order book represents large corporate customers with over 100 or more trucks.) If the company is able to sell or lease every truck which has been reserved, that would translate to $10 billion in revenues. (Nikola does not plan to begin production of their trucks until next year at the earliest.)
One customer name that comes up a lot is Anheuser-Busch (BUD) which plans to lease up to 800 Nikola Two FCEV trucks (Nikola’s investor deck calls the agreement with AB “binding,” whatever that means). If you recall, Anheuser-Busch and Nikola made the news last November when a semi truck full of Budweiser beer was delivered with zero emissions to be drunk by a bunch of people who could care less how their watered-down beer arrived.
Keep in mind that Nikola’s initial rollout is in a State that looks upon green stuff extremely favorably. And we’re not just talking about puffing the magic dragon. In The Golden State, the Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project incentives reach as high as $165,000 for a Class 8 BEV and $315,000 for a Class 8 FCEV. Other companies are also eyeballing this space.
Nikola Motor Company’s Competition
FCEV Competition
Due to the aforementioned chicken-or-egg problem, there are fewer competitors in the FCEV Class 8 market. However, Hyundai and Toyota have decided to focus their efforts on FCEV as the powertrain of the future. Hyundai intends to enter the European market for medium-duty vehicles with their fuel cell truck, the Hyundai Xcient. Toyota is collaborating with Kenworth, an American manufacturer for medium- and heavy-duty Class 8 trucks, to jointly develop a hydrogen fuel cell heavy-duty truck, and Daimler and Volvo recently announced a proposed joint venture to develop fuel cell systems for heavy-duty trucks. These same companies will need to invest in hydrogen infrastructure to fuel their trucks.
BEV Competition
The SEC filing talks about how Tesla, Daimler, Volvo, as well as other automotive manufactures, have announced their plans to bring Class 8 BEV trucks to the market over the coming years. Tesla announced their concept vehicle, the Tesla Semi, in November 2017. Daimler announced its plans for the eCascadia, which is the electric version of their flagship Freightliner Cascadia, in June 2018. Volvo announced plans to commercialize its BEV heavy-duty truck, the VNR Electric, in December 2018. Other competitors include BYD, who they believe is currently selling Class 8 BEV trucks, Peterbilt, XOS, and potentially Cummins.
Nikola Motors vs. Tesla
There is no love lost between these two companies that are both named after the same inventor. In May of 2018, Nikola sued Tesla claiming that Tesla’s own electric semi truck was too similar to Nikola’s. The lawsuit appears to have some merit, something that probably irks Mr. Musk to no end considering he once said the whole hydrogen vehicle thing was cow manure.
Last year, Nikola announced a new battery pack that they’ll unveil this coming Fall powered by new cell technology expected to cost 50% less to produce than lithium-ion. In the words of Nikola’s visionary CEO Trevor Milton:
“This is the biggest advancement we have seen in the battery world. We are not talking about small improvements; we are talking about doubling your cell phone battery capacity. We are talking about doubling the range of BEVs and hydrogen-electric vehicles around the world.”
Credit: Nikola Motor Company Press Release
With this breakthrough, Nikola trucks could weigh 5,000 lbs. less than the competition if same battery size was kept. Nikola’s hydrogen-electric fuel cell trucks could surpass 1,000 miles between stops and top off in 15 minutes. Not to be outdone, Tesla is planning their own battery technology reveal this summer which has something to do with their acquisition of one of the main players in the ultracapacitor space. In another comment, Mr. Musk suggested that people cannot fathom just how many batteries his company plans to produce on the back of Tesla’s battery breakthrough.
Developing a better battery will be extremely beneficial to the operator, especially when it comes to increased range. Nikola expects a 3% to 4% decline in the battery life per year, which will decrease the range of their trucks over 5 years by approximately 20%. It’s expected that battery prices continue falling. According to a 2019 report by BloombergNEF, from 2010 to 2018, Lithium-ion battery prices saw an 85% cost reduction. There are plenty of thought pieces covering this high-tech pissing content, so let’s move on to what most of you came here for.
Is Nikola Motors a Public Company?
Nikola Motor Company stock may become available for retail investors to purchase, something that may be both a blessing and a curse. We previously discussed how blank check companies work, and that appears to be the path Nikola Motors is taking to market. A blank check company called VectoIQ (VTIQ) raised around $230 million and is now in talks with Nikola Motor Company to take them public along with an additional raise of $525 million from institutional investors. If successful, this event will give Nikola around $709 million in capital to grow the company after the lawyers and bankers get paid.
So far, everything seems straightforward here except for the price of VectoIQ stock (soon to become Nikola Motor Company’s stock). The deal is structured such that if everything goes pear-shaped, VectoIQ will simply liquidate the blank check company and give everyone back their money. Here is how much your shares of VectoIQ will be worth if that happens:
For illustrative purposes, based on funds in the Trust Account of approximately $238.4 million on December 31, 2019, the estimated per share redemption price would have been approximately $10.36.
Credit: VectorIQ Form 424B3
Today, VectoIQ shares trade at around $28.63 per share. In other words, if that deal falls through for whatever reason, anyone who holds shares in VectoIQ will lose about -64% of their investment immediately.
Now, let’s assume the deal goes through at current prices. We can easily figure out the implied valuation of Nikola Motor Company at a share price of $28.63 with the following additional information:
The Public Stockholders will own 23,000,000 shares of VectoIQ Common Stock, representing approximately 6.4% of the total shares outstanding.
Credit: VectorIQ Form 424B3
The math (23 million shares X $28.63 / 0.064) tells us that Nikola Motors would have an implied valuation of $10.3 billion based on what retail investors appear willing to pay today. Institutional investors are paying a whole lot less.
Is Nikola Motor Company Overpriced?
As part of the merger transaction, there is what’s referred to as “the PIPE transaction” where just under 15% of the company will be sold for $525 million. This additional capital will be used for the company’s ambitious growth plans. Those PIPE shares will be sold at $10 per share which is what institutional investors are willing to pay. All the millennial investors on Robinhood appear willing to pay a premium of 186% based on what shares trade at today, a number which should be discounted based on the likelihood – however small – that the deal may not go through. Nothing adds up here, and when we see irrational behavior like this on exhibit, we immediately move to the sidelines. Virgin Galactic (SPCE) is a good example of why you should stay away from hyped stocks until the dust settles.
Some people might suggest shorting a stock that appears to be wildly overvalued, but that’s not a good idea for amateur investors. Rest assured, the herd is capable of demonstrating far more irrationality than your margin limits, which is how short squeezes happen.
If you do manage to purchase Nikola stock at an attractive entry point, here are the financial projections you need to pay attention to.
As you can see, first-to-market is Nikola’s BEV which has an estimated range of 250-300 miles and is designed to address the short-haul market. During the initial roll-out, customers will be responsible for their own charging needs. In 2023, the first FCEVs are expected to be leased.
As with any high-growth market, an aggressive strategy to capture market share makes sense, with profitability taking a second seat. What’s not negotiable is revenue growth. Nikola needs to manufacture trucks and sell them at the rate which they are projecting. The inability to execute on the plan could reflect a fundamental problem with the business model and/or hydrogen fuel cell technology not living up to its expectations.
Conclusion
With the State of California offering some massive incentives for transport companies to adopt FCEVs, it remains to be seen what cost savings can be realized without subsidies. Sure, a zero-emissions semi truck will make all the ESG types rub their hands together with glee, but what the trucking industry needs is a commercial vehicle that’s less costly to operate and with more predictable expenses. That’s why Nikola’s value proposition is so appealing to investors and customers alike. Like Tesla, they just need to manufacture a whole bunch of electric vehicles and make a profit off them without going bankrupt.
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Federal criminal fraud charges against Trevor Milton accuse the Nikola founder of lying about “nearly all aspects of the business.”
Why are we not surprised that SPACs, which do nothing but make forward looking promises, get busted for misleading investors?