The Nikola Corporation Conundrum

Traders and investors appear to be having a cold war of sorts right now, and Nikola Corp could be its flashpoint

A simple scouring of my Facebook (NASDAQ: FB) or Twitter (NYSE: TWTR) feed in recent days is enough to cheer me up in even my glummest mood. This is because I am presented with a litany of memes, funny tweets, and anecdotes regarding flippant trading attitudes towards Wall Street right now. Here’s an example of my favorite meme right now regarding day traders:

Of course, it’s easy to laugh away this kind of errant behavior, but perhaps we should be looking a little closer at the dangers. Billions of dollars are being printed to boost the economy, billions are being given away in zero-interest loans, basic investing fundamentals are going out the window. It’s as if traders are playing a very high-stakes game of poker with Wall Street. 

Let’s look at some of this errant behavior.

The problem with Nikola

At this point, I doubt there’s an investor who hasn’t heard that ‘Elon Musk should buy Nikola (NASDAQ: NKLA)’ joke. If you haven’t, it’s not because Tesla (NASDAQ: TSLA) would benefit from buying out a competitor, but more so because he could rename his flagship company ‘Nikola Tesla’, the namesake for both companies. 

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Electric vehicle-makers are hot stocks right now as evidenced by Tesla’s all-time high it hit this week, the hype surrounding China’s NIO (NYSE: NIO), and now Nikola Corp, which surged 104% on Monday — yes, 104 PERCENT — and a further 9% on Tuesday. 

Nikola Corp. went public through a reverse merger with VectoIQ Acquisition Corp last week and is one of the first pure-play electric-vehicle competitors to Tesla. It is also now worth roughly as much as Ford (NYSE: F) by market cap, but let’s look at the figures:

  • Ford’s 2019 revenue: $156 billion
  • Ford vehicles sold in 2019: 5.4 million
  • Nikola 2019 revenue: *estimated* $47 million
  • Nikola vehicles sold in 2019: 0

Yes, there will be those who will argue that ‘Ford is in decline, Nikola is the next big thing’ etc. and yes, potential is and should play a large role in an investment thesis. However, that still doesn’t come close to justifying such a price for a company that has sold 0 vehicles and has no factory. 

“Beware the next something”

This hype mindset that appears to have taken over the ‘memesphere’ has gone one step further than the rage which surrounded the likes of Virgin Galactic (NYSE: SPCE), Beyond Meat (NASDAQ: BYND), and even more recently, Draftkings (NASDAQ: DKNG). At least these companies are already generating consistent revenue and have a clear path to profitability, whereas Nikola is in the extremely early stages of its life, with its recent performance largely driven by — dare I say it again — internet hype. It whiffs of WeWork to me — ok probably not that bad, but I would like to see how they manage when they’re actually producing cars first. 

I can already hear the Robinhood traders calling me a ‘boomer’ (despite being a young millennial), but I’m going to draw your attention to a passage from Peter Lynch’s highly informative ‘One Up On Wall Street’, where he tells investors to ‘beware the next something’. It is a simple concept, but Lynch — one of the greatest minds behind investing in modern history — made a point of never going for a stock touted as the next IBM (NYSE: IBM), the next McDonald’s (NYSE: MCD), or the next Apple (NASDAQ: AAPL); you get the point. 

You can’t simply copy a business model and hope to succeed, but rather you need to offer what your competitors can’t. That’s why I am wary of Nikola, which is already being touted as ‘the next Tesla’, when Tesla itself is still far from the complete product, having yet to post a profitable year. 

“OK Boomer” investing is ok too

Depending on the type of risk you’re happy to take on as an investor, you can have a variety of small to large-cap companies in your portfolio. However, it is always a good idea to include stocks that are ‘safe bets’ and consistent. Such stocks include Facebook, Amazon (NASDAQ: AMZN), Apple, Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), and other large-cap firms. We saw their worth once more only yesterday when the tech-heavy Nasdaq (NYSEARCA: QQQ) was driven to new heights. 

There is a lot more to investing than this, and the same goes for internet memes, which aren’t a suitable investment thesis. Luckily, MyWallSt(r) has all the information you need to build a successful portfolio and take control of your financial future, so sign up for free access today and embark on what could be the most important first steps you ever take.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.