The Investor Diary Entry #39: May 10, 2023
I never thought that my diary for today will continue talking about Nikola Corporation until I finish its stock analysis, but yesterday’s earnings’ announcement brought various shocking Nikola Stock News.
Yesterday’s Nikola Stock price before the earnings’ announcement was around $1.05 rising from $0.98. Nikola Stock price today as of writing these words is at $0.88 before opening hours, rising from $0.86 at yesterday’s closing.
Nikola Stock news brought things approaching the strategic thoughts that I talked about in my diary entry titled Nikola Corp Stock Analysis.
The strategic changes that Nikola introduced were in two major areas.
Nikola Business Direction
One of the articles that analyzed Nikola’s announcement put forward what are the business areas that Nikola wants to prioritize and focus on which are:
- North America.
- Hydrogen fuel-cell trucks.r
- HYLA brand hydrogen refueling business.
- Autonomous technologies.
The article makes the reader notice that Battery Electric Vehicles (BEV) are missing from those business focus areas. The article moves forward to deduce that Nikola will no longer produce BEV trucks and will only concentrate on Hydrogen Fuel Cell Trucks.
This made the author of the article conclude that Nikola wants to shift from an Electric Truck maker to a Hydrogen company.
Now, this makes more sense to me, especially that there is another article mentioning that the Hydrogen Fuel Cell Electric Vehicle truck orders were one of the reasons why Nikola decided on this strategic move.
What I also found sensible from Nikola is that they said that they keep producing BEV trucks, but only for client orders. I found this to be clever as well. If order numbers justify the business, then they will continue on this strategy. Otherwise, the logical thing for Nikola is to eventually close the line.
I found it clever because today there must be still some BEV orders. Instead of closing the line today, they will continue delivering these orders. If orders continue to come in, then this will justify a business decision to continue producing to orders.
All in all, Nikola to finally realize that it is in the Hydrogen business and not in the truck making business is great news. This is what I was driving at in my yesterday’s analysis.
What I still need to find out is how they are going around the autonomous driving technology.
Now, I feel more convinced of Nikola’s business direction, but I still need to understand two major things; the autonomous driving technology, and the current value of the stock which will lead me to decide if I am going to invest in Nikola, then how much I will to pay.
Let us move to the second strategic move.
The Joint Venture With IVECO
To cut the story short, IVECO is ending the joint venture IVECO and wants to move away from the expansion into Europe. What it wants to do is to concentrate on North America as it sees more opportunities there in clean energy including Hydrogen.
What made Nikola think that, and what findings led it this conclusion is something that I am not aware of. One of the major areas in the Hydrogen industry is the policy making speed of governments adopting and encouraging clean energy in general and Hydrogen in specific.
What I know is that European governments want a speedy transformation to alternative energy sources including Hydrogen. This is so, for various obvious political and economical reasons. Yes, there are environmental reasons, but environmental reasons have been there for ages, the pressing pressures are political and economical.
I didn’t mind much the European expansion when I saw it, but looking at it from another perspective, the more focused the business is at the beginning the better. It brings better resource allocation that can greatly affect estimated return on invested capital (ROIC).
As much as I didn’t mind the geographical expansion, one of the major weaknesses that I find in Nikola is the over-expansion in business focus.
Nikola And Cash Burning
We mentioned yesterday that one of our major concerns in the truck making focus of Nikola is the competitive landscape. The electric truck making is full major automotive brands; in addition to other brands that have recently risen in the field of electric vehicles, and moving into the truck making business.
Such competitive landscape will force competition to slash its prices, and therefore, their margins. We have seen this already happening in the small vehicles sector, and the major shock wave in prices that was caused recently by Tesla.
One of the major reasons why Tesla made such a drastic move was to be able counter Chinese electric car makers. Such moves are inevitable in the Electric Truck making sector.
For Startups and companies who are still not making money or still not making profits, such cash burning is beyond their means. For Nikola to make this realization that the electric car making is packed and would eventually lead to inevitable price slashing wars is amazing.
The Hydrogen Fuel Cell production is still new, Nikola has a chance for a first mover advantage in this sector. Gathering its focus on this area is great for its market positioning, and for maintaining its profit margins in a sector that will not see, at least for now, the price wars that will certainly happen in the near future in the Electric Truck making field.
The Geographic Focus will also play a major role in the reduction of cash burning, and will bring focus to the capital investments that will allocate for market penetration.
The Autonomous Driving Technology
I am not against the concept of having Autonomous driving technology installed in Nikotola’s trucks. Once the technology becomes applicable, it will have great benefits to be added. Not only that, if other truck manufacturing companies started installing such technology while Nikola is not doing that, will for sure affect its truck marketability.
I am will the direction to have such technology installed in Nikola’s Hydrogen Fuel Cell Trucks, once it is tested for safety and reliability. My concern here is that developing such a system is not within the core competencies of Nikola Corporation.
It is still an answered question why Nikola has this as one of business focus areas, and once I have a clear convincing answer it will remain a major concern. Developing such a system which might be perceived as noncompetitive with other systems available in the market is show stopper for its truck sales.
It is not a disadvantage, it is a deal breaker for clients.
Conclusion
I am glad that Nikola has found its way into retraction and increased focus, as it makes a lot of business sense in various ways.
I was interested in investing in Nikola with scary concerns that were capable of driving me away from the company, but now things got more exciting for me, and I am looking forward to knowing more especially about their plans on autonomous technology, and knowing if the company is a value today.
If it is not a value play today, at which level it will become a value play. In many small cap companies which are extremely difficult to decide on their value considering that they don’t have much of a history to study, I invested a small amount on their prices then just to be part of the industry that they play within.
Would this be the case with Nikola? I am not sure. Let us see what the rest of my research will bring.
The Investor
Wednesday 10 May 2023
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