Nikola (-6.74%)—yes, this company remains on the public market—experienced another plunge of over 20% this week, as reported by S&P Global Market Intelligence. The hydrogen-electric truck start-up continues to expand its shares outstanding, insiders are consistently offloading their shares, and the company is far from achieving profitability. Unsurprisingly, the stock has plummeted more than 99% from its peak.
The stock’s decline appears to have no end in sight, largely because the company lacks substantial business fundamentals. Here’s a closer look at why this is the case.
Insider Selling and Unsatisfactory Business Performance
The trend of insider selling at Nikola persists. Recently, the Chief Operating Officer, Chief Financial Officer, and President—all critical positions—announced intentions to sell portions of their holdings in the company.
When insiders sell shares in a company whose stock has already dropped 99%, it’s rarely a positive indicator. Typically, one would expect a management team to exude confidence in the business, even amidst a declining stock price, which would ideally manifest as insider purchases. This situation is quite the opposite.
The rationale behind management’s decision to sell is evident: the business is miles away from turning a profit. In the last quarter, Nikola reported merely $31 million in revenue against a net loss of $134 million. Over the past year, the company has burned through $500 million in free cash flow, despite generating less than $50 million in sales.
While Nikola claims its hydrogen fuel semi trucks will revolutionize the transportation industry—a claim it has reiterated for years—the technology has yet to demonstrate viability.
Given Nikola’s minimal revenue generation and cash burn, it’s hardly surprising that the stock has fallen over 99% from its all-time highs.
A Closer Examination of Shares Outstanding
To conclude our discussion on Nikola, let’s consider the lesson regarding shares outstanding. As an outside shareholder, you prefer to see shares outstanding decrease through share buybacks, allowing you to own a larger portion of the business each year.
A company continuously increasing its shares outstanding signals a red flag, indicating a reliance on selling more stock to finance its operations—a practice unnecessary for profitable companies.
Nikola has seen a 300% increase in shares outstanding over recent years, a glaring red flag resulting from its extensive free cash flow burn. This pattern reveals a company consistently running out of cash and resorting to selling stock to avoid bankruptcy.
All these factors highlight why this is not a stock you’d want to hold long-term.
Should You Invest $1,000 in Nikola Right Now?
Before considering an investment in Nikola, think about this:
The Motley Fool Stock Advisor analyst team has recently identified what they believe to be the 10 best stocks for investors to buy now, and Nikola was not among them. The selected stocks have the potential to yield substantial returns in the coming years.
Reflect on when Nvidia was part of this list on April 15, 2005. Had you invested $1,000 based on our recommendation then, your investment could have grown to $656,938!*
It’s noteworthy that Stock Advisor’s total average return stands at 722%, significantly outperforming the S&P 500’s 161%. Don’t miss out on the latest top 10 list.
Discover the 10 stocks
*Stock Advisor returns as of September 3, 2024
