After there was a glimmer of hope that it would escape bankruptcy thanks to the high demand for its new FCEV truck, Nikola Corporation (Nasdaq: NKLA) finds itself in a highly precarious situation once again after Proterra Inc. (NASDAQ: PTRA) declared bankruptcy. As PTRA is the sole battery supplier for the company’s FCEV truck, NKLA may find it hard to fulfill the orders it received for its new truck. Considering the company’s financial struggles, the possibility of bankruptcy is once again high which makes NKLA stock a potentially profitable short play.
NKLA Stock News
Financial Woes
As is, NKLA is stuck between a rock and a hard place. Currently, the company has a dwindling cash balance that is not enough to pay off its current liabilities as it has a cash ratio less than 1 at .43. Moreover, it has a negative gross margin worth triple its revenues which indicates that the company is losing substantial amounts of cash for each vehicle it sells.
At the same time, NKLA has an unsustainable cash burn rate as it burned $179 million in OCF in Q1 2023 and with $121.1 million in cash on hand, the company’s cash balance may not be enough to last the company another quarter. On that note, the company stated in its Q1 earnings that it is operating as a going concern which could see the company have a similar fate to Bed Bath & Beyond (OTC: BBBYQ) which declared bankruptcy a quarter following the introduction of going concern language in its earnings.
The Only Escape From Bankruptcy
That said, NKLA is looking to gain shareholders’ approval on a provision allowing it to double its authorized shares from 800 million to 1.6 billion to access the required funding it needs to continue its operations. According to the company’s Q1 earnings call, it has access to $243 million available under its share purchase agreement with Tumim and $200 million available on its ongoing ATM offering. However, the company is not able to issue shares to access this capital since its OS is nearly maxed out with 716.9 million shares outstanding out of the authorized 800 million.
With that in mind, it appears that NKLA’s shareholders are not that enthusiastic about that provision since the company had to adjourn its annual meeting from June 6 to August 3 to ensure that the provision passes. The reason behind the company’s decision is due to an amendment to the Delaware General Corporation Law that is expected to be effective August 1.
Once this amendment is effective the voting threshold to increase the company’s authorized shares would change from the majority of outstanding shares to the majority of shares actually voting on the provision. By doing so, the company’s management appears desperate to pass this provision which shows that NKLA’s outlook would be bleak without raising its AS.
In case the provision passes, NKLA stock may plummet significantly due to the expected dilution the stock will witness. As things stand, NKLA stock is already overvalued as its Book Value Per Share (BVPS) is $.79 which is a far cry from the stock’s current PPS of around $2. On that note, if the provision passes, the stock’s BVPS would fall to $.34 – marking a downside of 56.9%. In this way, the stock should follow suit and decline by 56.9% at least considering that it is currently overvalued. Meanwhile, if shareholders do not approve the provision, bankruptcy may be NKLA’s only option to reorganize its business as its burn rate is unsustainable due to its dwindling cash balance.
Risks
Although taking a short position in NKLA stock may lead to substantial gains, investors should note that the stock is highly shorted with a short interest of 24% and 47.6% of its float on loan which makes it prone to short squeezes as shown by its latest parabolic run last week. For this reason, investors taking a short position in the stock should set a stop loss to hedge against the risk of short squeezes occurring.
*Updated August 9th, 2023
An Unfortunate Event
With the company pivoting to hydrogen energy, NKLA entered into a long-term strategic partnership with PTRA to supply it with batteries for its Tre BEV and Tre FCEV trucks. The company started producing the Tre FCEV truck on July 31st amid optimism that it would save the company thanks to the high demand it is witnessing. This demand was shown with the company sharing that it received 202 orders for the new truck.
However, in an unfortunate turn of events, PTRA filed for chapter 11 on August 7th – only 1 week following the start of production of the FCEV truck. In this way, NKLA may be unable to fulfill the orders for its truck which will severely impact the company’s long-term prospects given its dire need for cash to continue operating.
The results of PTRA’s bankruptcy are catastrophic for NKLA and its shareholders since the company would have to resort to dilution to raise capital which may increase the company’s outstanding shares significantly since its shareholders approved the proposal to raise the authorized shares from 800 million to 1.6 billion. Based on this, shorting NKLA stock may prove to be a profitable decision given that its options now are either bankruptcy to restructure its business or mass diluting its stock which will impact the share price negatively.
NKLA Stock Financials
Q1 2023 Earnings
One of the most alarming figures in NKLA’s financials is its cost of revenue, which was $44 million in Q1 2023 while realizing around $11 million in revenue. This discrepancy between revenues and cost of revenues resulted in a gross loss of $32.9 million and a jaw-dropping gross margin of -296%. This imbalance has drastically strained the company’s assets as its total assets decreased QoQ from $1.23 billion to $1.15 billion, due to a sharp cash balance decrease from $233.4 million to $121.12 million.
This sharp plummet is likely a result of NKLA’s gross loss and current liabilities of $276.5 million sapping its cash balance. Despite this, the company has done a tremendous job decreasing its current liabilities QoQ from $383.5 million due to declines in its accounts payable and accrued expenses. In this way, total liabilities dropped $710.1 million to $612.4 million. However, the company’s cash balance remains a fragment of its current liabilities even after accounting for its $10.6 million in restricted cash.
In terms of revenue, NKLA experienced a substantial YoY increase from $1.88 million to $11.11 million which is due to the fact that it recorded no product revenue in Q1 2022. When it comes to expenses, NKLA experienced a significant decrease from $151.74 million to $118.13 million and is expected to experience another significant decrease in expenses due to its departure from Europe. It is still worth noting that any expenses accrued will have a negative effect on the company’s already weak balance sheet. When it comes to net loss, NKLA experienced a sharp spike from $152.94 million to $169 million due to the aforementioned reasons.
Q2 2023 Earnings
One of the most alarming figures in NKLA’s financials is its cost of revenue which is $24.9 million according to its Q2 2023. This figure is alarming because during this time the company only realized around $15.3 million in revenue. This discrepancy between revenues and cost of revenues resulted in a gross loss of $27.6 million and a jaw-dropping gross margin of -179%. This imbalance has drastically strained the company’s assets as its total assets decreased from $1.23 billion in Q4 2022 to $1.13 billion in Q2 2022 due to a sharp decrease in restricted cash and cash equivalents from $10 million to $600 thousand.
This sharp plummet is likely a result of NKLA’s gross loss and current liabilities of $233.1 million sapping its cash balance. Despite this, the company has done a tremendous job decreasing its current liabilities from $383.5 million in Q 4 2022 due to declines in its accounts payable and accrued expenses, leading total liabilities to drop from $710.1 million to $614.7 million.
At the same time, NKLA’s operating costs slightly improved YoY from $142.9 million to $140.9 million. However, the company’s net loss increased substantially YoY from $172.9 million to $217.9 million. Having said that, the company’s net loss would have been much higher if not for NKLA divesting its Iveco stake which provided it with $70 million.
Media Sentiment
@JesseLeeDow1 is bearish on NKLA stock despite its recent run.
@TheSpacShack explaining the consequences of Proterra’s bankruptcy on NKLA.
Technical Analysis
NKLA stock was in a bullish trend as it was trading in an upward channel that it recently broke. Looking at the indicators, the stock is above the 200 MA which is a bullish indication, but below the 50 and 21 MAs which is a bearish indication. Meanwhile, the RSI is neutral at 36 and the MACD is approaching a bullish crossover.
As for the fundamentals, NKLA may drop drastically in the near term following PTRA’s bankruptcy since it may not be able to fulfill the orders it received for its new FCEV truck given that PTRA was the sole battery supplier for the truck. In this way, it is very likely the company resorts to mass diluting its shares to raise the capital it needs since it may not generate enough capital from its operations.
With the stock trading near its resistance, investors could wait for retests of the resistance and go short with take profits near $1.96, $1.32, and $1, while setting a stop loss near $2.3 if it breaks resistance.
NKLA Stock Forecast
After PTRA declared bankruptcy, NKLA is in a tricky spot since the company intended to raise funds from the purchase orders it received for its FCEV truck and limit dilution. However, now that the company may not be able to fulfill these orders due to PTRA being the sole battery supplier for the FCEV truck, its chances of surviving its financial struggles appear to be slim to none. In light of this, investors could find it profitable to short NKLA stock given that the company may join PTRA in declaring bankruptcy or mass diluting its shares to raise capital which would negatively impact its share price.
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