One of the most controversial electric vehicle start-ups on the market is Nicolas (NASDAQ:NKLA).
NKLA went public through a reverse merger in June 2020, with a SPAC called VectorIQ Holdings. Red flags appeared almost immediately, ranging from a suspicious test deployment in 2020 to a controversial deal with General Motors (NYSE:DG) which was quickly debunked by short-selling research firm Hindenburg Research.
In that report, Hindenburg claimed that Nikola made false or misleading claims about its battery technology, hydrogen production capabilities and other issues. The report also states that NKLA designed key components of its trucks in-house, but the technology was in fact licensed or purchased from third parties.
History of car manufacturers
The beginning of the 20e century the history of automobile manufacturing is very different from what most people think.
There were hundreds of car manufacturers producing all types of cars at the start of the internal combustion engine boom. In 1908, there were 253 automakers which fell to 44 in 1929, a still shockingly high number. Most of them were wiped out during the Great Depression and a few were absorbed into what became the Big Three – General Motors, Ford (NYSE:F) and Chrysler.
It is an incredibly difficult business with huge capital requirements. Automotive manufacturing does not evolve as well as a software business. All cars, whether electric or gasoline, are heavy equipment that requires an incredible amount of steel, plastic, glass, and electronics. Few companies can evolve over the long term. There are doubts, even the world leaders in electric vehicles like You’re here (NASDAQ:TSLA) can succeed.
What are Nikola’s finances like?
The company held 271.9 shares at the end of the first quarter of 2020, which climbed to 392.5 million at the end of the first quarter of 2021 and now stands at around 400 million. That gives it a market cap of around $ 6.4 billion, which is pretty high for a past income company with a high cash consumption rate.
On-balance sheet cash stood at $ 763 million at the end of the first quarter of 2021. The burn rate for the first quarter of 2021 was approximately $ 75 million. If this continues throughout the year, it will give the business 2 years until it needs to find additional sources of funding. Production and sales may be this year at some point, but profitability and free cash flow are many years away, certainly much more than 2 years away.
If the capital markets stay open, then the NKLA has a chance to get out. But if they close as in 2008, the NKLA will receive a “going concern” warning as a rival Lordstown Engines (NASDAQ:DRIVE) did this summer.
This environment of free money and low interest rates in which we have lived for nearly a decade keeps many dubious and speculative business ventures afloat, often longer than it should. As Warren Buffet once said, “It is only at low tide that we find out who swam naked”
As of the publication date, Tom Kerr does not hold any positions in any of the stocks mentioned in the article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. He is currently a Senior Portfolio Manager at Rocky Peak Capital Management. Previously, he was Director of Investments and Director of Research of SGL Investment Advisors, and held several positions in other investment-related organizations. Mr. Kerr has also collaborated with TheStreet.com, RagingBull.com and InvestorPlace.com. He is a CFA charter holder and earned a BBA in finance from Texas Tech University.