The future of transport will almost certainly depend much less on fossil fuels than it does today. That’s particularly true in the trucking segment, where fuel is one of the biggest expenses for fleet operators, and its corporate customers are looking for ways to reduce their carbon footprints.
Nikola (NASDAQ: NKLA) It is one of the companies expected to be a disruptive force in trucking. The company is developing heavy vehicles that combine electric motors and hydrogen fuel cells, with the aim of directly competing with the diesel-powered machines that dominate the roads now. Since the company went public through a merger in June, the first investors in the company have already nearly doubled their money.
But are there more gains in the stock price to come? Investors expect big things, considering Nikola hasn’t even started commercial manufacturing yet and could be a year away from mass-market production. Let’s take a closer look at whether or not Nikola has a potential millionaire.
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An industry difficult to disrupt
Diesel is the standard for medium and heavy duty transportation. Whether it’s a class 8 tractor-trailer, dump truck, or other vehicle that carries heavy loads or travels long distances, the diesel engine remains the preferred powertrain.
The main reasons are access to fuel and range, but there are also operational benefits in terms of service and maintenance costs. If a fleet operator adds a different technology, it also has to add the ability to service those vehicles. That means more parts in inventory, new training for maintenance employees, and changes to maintenance facilities.
Therefore, for the owner of a transport fleet to make a change, there has historically had to be a clear financial benefit. That’s why, until now, no technology has displaced diesel significantly, especially in heavy trucks.
Image source: Getty Images.
The closest to a significant disruption thus far has come from Clean energy fuels (NASDAQ: CLNE), which provides natural gas and renewable natural gas to transport users. The company has steadily increased its fuel volumes at nearly double-digit percentage rates for years, but it’s only now approaching a level of 400 million gallons per year. By context, heavy trucks consume more than 40 billion gallons of diesel annually in North America.
What does Nikola bring to the table? The potential to disrupt diesel in a way that other technologies have failed, because it can compete on weight and fuel range, and offers a transmission system that requires much less regular maintenance than combustion engines.
The company also says it can provide all of that with a total cost profile that is less than what operators pay today for diesel trucks. If Nikola can, in fact, break through those barriers to entry for a new technology, it could be hugely successful.
Why are the risks high?
Over the past decade, there have been great strides in all the technologies Nikola has to deliver on its promise, but no one has packaged them in a heavy vehicle and has shown that it can really deliver.
Nikola aims to change that. The company says it has orders for nearly 15,000 fuel cell electric trucks worth $ 10.2 billion in revenue, with the majority of those orders coming from large fleet operators. Potentially your most important order is AB InBev (NYSE: BUD), which has a binding order for 800 trucks; 65% of orders are from corporate clients with investment grade credit ratings.
A key thing that underpins a large part of these orders is that many are not from trucking companies, but from large corporations that are factoring in the reduced greenhouse gas emissions from a diesel change in their decision. Carbon footprints have become more important factors in many corporate investment decisions in recent years, and are likely to become increasingly important because shareholders say how companies tackle climate change is more important. for them.
Image source: Getty Images.
That’s great for Nikola, Tesla (NASDAQ: TSLA)and other companies developing commercial transportation powered by low-emission energy sources (including Clean Energy’s Redeem biomethane).
However, the risks remain enormous simply because no one – not Nikola, Tesla, or any of the big truck manufacturers – has shown that these technologies can reliably meet the demands of operating 100,000 miles per year in various environments and applications. Of transport.
And therein lies the greatest risk to Nikola. Despite having more than $ 10 billion in orders on hand, the company has yet to demonstrate that it can deliver on what it promises, and it will likely be a year or more before potential buyers can find out if Nikola trucks meet. Your expectations.
It is a massive “yes” and a long wait before getting an answer. And Nikola will not sell a single product during that period.
I also hope that it is not the first or the only company to bring a zero emission truck to the mass market. Competition will be fierce. Truck and powertrain manufacturers will no longer just turn around and cede the market to a new company that has never sold a single truck before.
YCharts NKLA (TTM) revenue data
A compelling story, but an enormously risky investment.
Look, anyone who really thinks Nikola has justified a market cap that is already higher than Ford’s is wrong. Nikola at this point is a huge stock of history. The idea of a zero emission heavy truck is compelling, exciting, and would be surprising to humanity and the planet.
I also think the odds are pretty good that Nikola will develop and sell battery powered and hydrogen powered electric trucks. Technical barriers are being lowered, and a growing desire to cut emissions is changing the narrative in boardrooms and fleet managers’ offices.
But based on your current valuation, I think Nikola investors are more likely to lose money in the next three years than stocks will prove to be a million dollar investment.
At this point, we don’t even know if Nikola can become a viable company. It has no manufacturing, service, or refueling footprint. It is a great idea with potentially attractive technology.
NKLA Market Cap data by YCharts
The market already values the company in the same range as some of the world’s largest truck and engine manufacturers. That prices at some incredibly high expectations for a company that is still a year or more away from commercial production. The stakes are incredibly high, and at their current valuation, even if Nikola runs perfectly, that wouldn’t guarantee good returns for investors opening positions today.
