J.P. Morgan Still Thinks Nikola Stock is a Buy — With Caveats

From just $10 a share to nearly $80, Nikola Corporation (NKLA) stock has come a long way. Problem is -- after approaching that $80 stock price in June, Nikola has come just about full circle. At a $25 share price, Nikola stock is almost back where it started from, prior to conducting its IPO-by-reverse merger into publicly-traded special purpose acquisition vehicle VectoIQ.

Nevertheless, not all investors are dismayed by Nikola's downfall. Indeed, at least one analyst -- J.P. Morgan's Paul Coster -- seems to think that Nikola's dramatically lower stock price today gives investors a second bite at this apple.

And rating Nikola stock "outperform" with a $41 price target, Coster thinks investors should take that bite. (To watch Coster's track record, click here)

Why does Coster think this? The analyst explained his reasoning in a note discussing disclosures Nikola made in a presentation on "National Hydrogen Day" last week. On the one hand, yes, Coster admits that "NKLA stock trades on very high multiples of distant-future revenue and EBITDA." Also yes, the analyst acknowledges that anyone paying Nikola's high stock valuation today must "assume successful execution of a multi-year strategy that takes the company from [no revenue at all] (today) to revenue of $10 billion later this decade," and from negative earnings "to EBITDA margins of over 12%."

"Conventional valuation techniques," warns the analyst, "probably don't make sense for at least another two years." So instead, Coster urges investors to focus on the "story stock" aspect of the company, and imagine what Nikola might accomplish to make itself worth the $41-a-share that Coster values it at.

To begin with, Coster lays out a path in which Nikola moves from zero revenues (and negative earnings) this year to $150 million in revenues (and still no earnings) next year to... $300 million in revenues (and -- you guessed it, no earnings) in 2021 to... suddenly jump ahead and record $10 billion in sales and $1.6 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) six years later.

However, Coster doesn't precisely tell us how he expects Nikola to make this leap. But he does identify several points that would prevent Nikola from getting where he hopes it is going. Flipping these factors around, it would appear that for Coster's buy thesis to play out in full, Nikola will need to:

  • "Hit production and other key milestones."
  • "Raise more than $2.0 billion" (in addition to what it has already raised) "to fund growth through 2025."
  • "Consummate" the partnership agreement that it has signed with General Motors, whereby GM will help Nikola to build its proposed "Badger" electric pickup truck.
  • Retain at least "a few key customers" including AB InBev, who have agreed to lease semi-trucks from Nikola.
  • And "land a fuel station partner before 2021 year end," so as to establish a hydrogen fueling infrastructure.

This last point is actually crucial to the success of Nikola's business plan, because Nikola doesn't actually want to sell customers hydrogen fuel-cell semi-trucks. Rather, Nikola wants to build the trucks, then lease them to trucking companies, and build the cost of refueling the trucks into the lease cost. For that to work, Nikola obviously needs to be able to provide the necessary fuel -- and for that it must have an infrastructure in place.

If there's one single factor to watch, which would totally disrupt J.P. Morgan's buy thesis on this company and turn Nikola stock from a buy into a sell -- it would be the last one.

Overall, NKLA gets a Hold from the analyst consensus – Wall Street is inclined toward caution here, where J.P. Morgan is willing to take a risk. The stock has 5 recent reviews, breaking down to 2 Buys, 2 Holds, and 1 Sell. However, while shares are selling for $24.74, the average price target of $36.40 indicates a potential upside of 47% over the next 12 months. (See NKLA stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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