Nicola Corp - Where To Next?

07/16/20 01:30:25 PM

by Matt Blackman

This takeover is helping spur a surge in alternative energy vehicle stocks, but is the trend sustainable?

Security: NKLA
Position: N/A

Nicola Corp's much anticipated reverse merger started trading under the NKLA symbol June 4. Originally priced at $10/share, it opened at $37.55 and settled to $33.75 by close. A takeover from VectoIQ, a blank check company that had been trading under the symbol VTIQ, had been trading in the $20-$30 range leading up to the acquisition of Nicola Corp.

But on Monday, June 8 NKLA closed above $73 then hit a high of $93.99 before settling to $79.73 into close the following day. Whether this phenomenal rise triggered the rush on alternative energy vehicle stocks or was a result of it, it was the start of a move that would see companies like electric vehicle auto manufacturers Workhorse jump 420% in the next month, Tesla (+60%) and Chinese competitors including NIO Inc (+121%) and Niu Technologies (+ 91%). As a group, auto manufacturers rose just 12% over the same period.

The big question from here is whether these alternative energy gains will hold? As NKLA soared into the stratosphere, the U.S. was officially declared in recession June 8. Stubbornly persistent Covid-19 cases in the U.S. and elsewhere also continue to hamper an economic recovery.

Figure 1. Daily chart of Nikola Corp that started trading June 4 and soared before bleeding momentum in early July.

Graphic provided by: Freestockcharts.com.

Nikola faces a plethora of additional challenges. First, it has yet to produce its first production vehicle at this point making the company "still more of a business plan than a business," according to Al Root of Barron's.

Secondly, as well as aiming to produce Fuel Cell Electric Vehicles (FCEVs) that include its signature semi tractor, it wants to become a hydrogen fuel supplier. Thirdly, to address the shortage of public hydrogen fueling stations, numbering just 46 across the continental U.S. according to the U.S. Department of Energy's Alternative Fuels Data Center, the company also plans to build a network of stations adding "execution and adoption risks" according to one analyst who covers the company.

Yet another risk rarely discussed in the media, is the efficacy of hydrogen as a "clean" fuel. Nicola Corp is described as "a global leader in zero-emissions and infrastructure solutions" in corporate releases. But according to the report (below), less than 1% of the fuel currently produced around the globe is green hydrogen made using green technologies such as wind, solar and geothermal energy or blue hydrogen derived in conjunction with carbon capture and storage (CSS). In other words, more than 99% of hydrogen in use today comes from natural gas or coal and is known as grey or black hydrogen, making it anything but environmentally friendly.

Another challenge and why companies in the fuel cell space like FuelCell Energy (FCEL) have struggled for years with moribund stock prices, is that success in executing on the hydrogen fuel dream has proven challenging. Technical challenges abound and even if the fuel can be sustainably made eventually, companies will have a difficult time competing on cost per mile with battery electric vehicles and clean electricity costs, both of which continue to fall.

Figure 2. Weekly chart of NKLA together with auto manufacturers from its takeover and subsequent hyperbolic move.

Graphic provided by: Freestockcharts.com.

The final elephant in the room and possible explanation for the lack of success compared to the battery electric vehicle market is efficiency. At 22% efficient, hydrogen power is more efficient than the internal combustion engine at 13% but a far cry from 73% life cycle efficiency enjoyed by battery electric vehicles (see article below).

Technically, NKLA saw its volatile bull flag pattern with flag support at $55 and resistance at $75 break down July 6 with a significant pattern support breach, taking the company back to just above where it was trading June 5. Traders will want to see the lows hold and a build of support and a new signal before executing a buy from here. What that will take in the way of news or fundamentals is anyone's guess.

On the positive side, Nikola is in the company of some very big players betting on a hydrogen vehicle future including Toyota, Mercedes, Volkswagen, Ford, Hyundai, Honda and BMW, many of which have been building hydrogen-power vehicles since the 1990s. This raises the obvious question and one which Nikola must not only answer but solve.

Why has it taken so long and so much investment for the concept to gain mass traction?

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. Matt has earned the Chartered Market Technician (CMT) designation. Follow Matt on Twitter at www.twitter.com/RatioTrade

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Nicola Corp - Where To Next?

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