Nikola Upgraded to Overweight by JPM on Potential of Hydrogen Economy
Shares of Nikola are attractive after falling 40 percent in July month-to-date, according to JPMorgan. The firm upgraded the electric trucking company to OVERWEIGHT from NEUTRAL, and reiterated its $45 price target.
Betting on the Hydrogen Economy: Nikola will use fuel cells instead of batteries on long-haul trucks to generate electricity for the motors. The success of Nikola hinges on its ability to execute the implementation of its FCEV-based trucking solution, which JPM says “could disrupt the global trucking industry and position the firm for a key role in a low-carbon future, beyond trucking, globally.”
Badger as a catalyst: One key driver for the stock is the Badger, a fully-electric and hydrogen fuel cell electric pickup truck. JPM notes that the announcement of an OEM partner for the Badger truck could push the stock higher. Nikola is taking in about 1,500 reservations a day, according to founder Trevor Milton. The pullback in the stock could reflect disappointment among investors.
Europe going green: The European Commission on Wednesday laid out its plan to promote renewable hydrogen as part of the anticipated Green Deal economic recovery plan.
What could go wrong: Fuel cells have yet to catch on in the car or truck market, with companies often opting to use rechargeable batteries to power their electric cars instead. JPMorgan says it could become less constructive on Nikola’s stock for reasons including failed execution of BEV and FCEV launches, higher than expected hydrogen costs, increasing competition, and customer concentration.
“Nikola could be very dependent on a few key customers during the start-up phase, most notably AB Inbev given this customer’s role in helping establish the point-to-point H2 system. Loss of AB Inbev or other key customers could prove ruinous to Nikola, especially in the next 2-3 years.”
Big picture: Nikola is a pre-revenue and pre-production company. As RBC analyst Joseph Spak puts it, Nikola is “Still more of a business plan than a business.” The core FCEV product launch is nearly two years away, and Nikola is 5-6 years away from the projected inflection into cash-flow profitability, according to JPMorgan. Despite the nascent nature of the hydrogen economy, the rise of electric vehicles and the emphasis from governments to shift to sustainable energy creates an opportunity for investors willing to take a risk on a young company drawing comparisons to Tesla.
