Nikola: Bull and Bear Cases

Nikola is overvalued because it chose the wrong technology for road vehicles. The fair market value is cash plus some multiple for engineers.

Disclosure: the author is short Nikola, meaning he financially benefits if the share price falls. Please consider this bias while reading.

Falsifiers: (1) Nikola abandons hydrogen and develops worldclass long-haul BEVs; (2) building hydrogen infrastructure and hydrogen vehicles is cheaper than estimated; (3) battery innovation lags and BEVs struggle to match range and rechargability hydrogen vehicles.

Bull Case

The bull scenario for Nikola is simple and alluring: hydrogen-powered trucks and road vehicles will provide a lucrative on-ramp to the multitrillion-dollar transportation market.

The Nikola website lists several advantages for fuel-cell electric vehicles, which are powered by hydrogen instead of battery technology:

  • Faster recharging
  • Longer range
  • Lower weight
  • Colder starts

Armed with these technical advantages, the company intends to target commercial freight users like Anheuser-Busch with a clear value proposition: bundle all transportation costs, including fuel and maintenance, into one payment tied to one vendor. Patterned after Tesla, Nikola will construct a network of charging stations and solve the transportation needs of commercial freight customers with a vertically-integrated offering.

Because these hydrogen charging stations do not yet exist, the Nikola business model faces a vexing problem common with Internet start-ups: building infrastructure requires acquiring customers, but acquiring customers requires building infrastructure.

Nikola’s solution to this chicken-and-egg problem is to deploy the charging network in a gradual fashion. Because commercial freight customers like Anheuser-Busch drive on a limited number of routes, and because hydrogen offers impressive range, Nikola can bootstrap the network with stations strategically located on customer routes. Once Nikola can prove demand with LOIs or other formal partnerships, it can attract investors to fund development of charging stations. As Nikola acquires more customers, it can amortize the cost of these stations, thereby generating capital and momentum to acquire more customers and expand the refueling network, which will in turn attract more customers.

At scale, a network of customers and fueling stations presents a considerable moat in a massive market, which could translate into handsome cash flows.

Sandy Munro is a noted expert in transportation and automobiles. In this interview, he firmly predicts a bright future for hydrogen-powered vehicles.

Deloitte China and Ballard published a report in 2020 declaring that FCEVs will be cheaper to operate than BEVs by 2030.

Bear Case

For long-haul vehicles, hydrogen is the wrong standard to support — not unlike choosing DC instead of AC in the early days of electricity. While hydrogen may prove ideal for commercial airplanes, VTOL aircraft, and other types of vehicles, BEV is likely to trump FCEV for road vehicles.

The hydrogen benefits touted on the Nikola website are quickly vanishing as BEV innovation accelerates. As more of the world embraces BEV, this gap will shrink and may disappear altogether, unless FCEVs later yield undiscovered advantages.

For instance, on the issue of range, Tesla recently announced its Semi line of long-haul trucks would boast up to 621 miles per charge. The maximum Nikola range is about 750 miles.

The issue of weight is more complex. Sandy Munro believes weight offers hydrogen a winning advantage.

Natural weight is a critical factor for long-haul trucks. These vehicles are capped by regulation to carry a maximum of 80,000 pounds. Extra pounds from the propulsion system and chassis mean fewer pounds available for transport — thus less revenue per delivery. Musk predicts that the Tesla Semi will weigh 1 ton more compared to diesel trucks, so the downside is sacrificing 2.5% (2,000/80,000) of sales potential per delivery when compared to diesel trucks.

Nikola estimates a more severe penalty compared to hydrogen trucks, roughly 10,000 pounds. Others expect a smaller delta, about 2–3 tons, due to rapidly advancing battery technology and architectural optimizations enabled by a BEV system.

Potentially losing 5% — 10% of sales per delivery when compared to hydrogen warrants concern, but it’s important to zoom out and consider the overall system. First, the sticker price of a Nikola truck is nearly 50% more than the Tesla Semi. This reflects the disparity between the immature state of hydrogen technology and the surging popularity of battery technology. Second, this assumes a meaningful gap will persist because battery technology and truck design fail to evolve, which is an unwise assumption as discussed below. Finally, theoretical lost sales is different from actual lost sales. Actual lost sales depends on how many deliveries would occur with displaced cargo and surrendered revenue. This analysis assumes the ratio is small, but the reader is urged to verify this assumption and measure lost sales within the overall financial context.

Ultimately, if battery becomes the world’s energy standard, the cost, reliability, and convenience of the ecosystem will prevail over specialized advantages afforded by hydrogen. BEVs enjoy an impossibly unfair advantage because they plug into the existing power grid and can leverage trillions of dollars worth of existing infrastructure. FCEVs, by contrast, will require new infrastructure for hydrogen distribution and refueling.

Here is a reasonably neutral overview comparing hydrogen and battery as car propulsion systems: https://www.youtube.com/watch?v=f7MzFfuNOtY.

Conclusion

The author shorted Nikola because the bull case for hydrogen road vehicles withers under scrutiny. For road vehicles, the world’s largest governments and manufacturers are moving in mass to adopt BEV as the standard for propulsion technology.

Historically, when industry leaders standardize on some technology, this delivers a death blow to alternatives. Unit costs drop due to economies of scale, that is things become cheaper to make because more people make them. Innovation accelerates because there are more customers and a larger market with which to justify research and development.

At this stage, battery appears poised to emerge as the transportation technology of the future. Betting on Nikola means betting on hydrogen. This may prove right, but it’s notably contrarian given the trend lines.

The bear case is bolstered by two facts: (1) Nikola is hedging against hydrogen with a BEV option; and (2) Nikola announced plans for a modest equity raise despite possessing ~2 years of cash ($850m as of 12/2020, assuming burn rate of $100m per quarter).

Most startups lack the financial and engineering resources to spearhead one transformative technology, let alone two. Splitting precious resources reveals an alarming lack of faith in hydrogen. This is telling. Also telling is Nikola’s financing plan: with so much cash in the bank, this opportunistic equity raise suggests Nikola believes its share price will fall in the upcoming months.

If hydrogen proves superior for other kinds of vehicles, it’s unclear that Nikola possesses the structural advantages to pivot successfully.

Assuming the bear case is correct, the fair market value for Nikola is approximately its cash hoard plus some multiple per engineer. The brand value appears tarnished and immaterial due to the damaging allegations of fraud and misconduct. Unless Nikola divorces hydrogen and doubles down on BEV semis. In this case, Nikola could present an interesting acquisition target depending on how well its BEV tech matures.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store