Disclaimer: This article is for education and entertainment purposes only.
1. Leadership – When I deploy capital into a stock for long-term holding one of the first things I will research, other than financials, is the structure of leadership. Great concepts won’t go anywhere if the wrong people are behind the wheel.
At Nikola World 2019 Trevor Milton, the company founder, said something that speaks volumes for the type of energy I look for within senior management. At 1 hour and 16 minutes into the YouTube video of this show Trevor says, “I want to bring everyone up [on stage] that is still at Nikola, which is everyone, that started in our basement.”
Retention of human resources is a great metric to watch in tech companies.
Now that Nikola Motor has just gone public we will see Trevor take on a role of Executive Chairman. The new CEO will be Mark Russell, Nikola’s current President, who just so happens to be from the company that bought Trevor’s previous startup. It’s nice to see the company being run by the people that first funded it. They also show care for their team by providing a workout gym and social outings over holidays.
You can learn more about the company leadership structure here:
2. Strategy – Nikola has designed a vertically integrated moat to gain market share by capturing revenues from both production and fueling of heavy duty trucks. While Nikola offers electric battery and hydrogen fuel cell options to power their motors, a long-term protective source of income will be built in Nikola’s zero emissions hydrogen station network. Building out a 700 station fuel network in America will be funded by Nikola’s unique sales contracts on semi-tractors.
Nikola offers all-inclusive deals to transportation companies for roughly $1 a mile. This price per mile is not only competitive with diesel, but it also bundles the use of a truck with all the fuel, warranty, service and maintenance needed. All the customer needs to focus on is their own drivers and the goods they ship.
For this very reason, Nikola builds their trucks with extra durability in order to keep them on the road longer. More miles and less maintenance will result in better cash flow. Nikola spends an extra 7k per truck on independent suspension and another 10k extra on building out beefier motor parts that are then toned down on specs to a lesser continuous rate. These upfront costs will extend lifespan on the frame and motor for a more profitable lease term.
Order at least 25 trucks and Nikola will put in a hydrogen station powered by solar, wind, or hydro free of charge to the customer. These stations will be set up universally for public use so that Nikola can supply fuel to competitor trucks as well. This campaign opens up the entire country’s transportation industry to adopt hydrogen as a fuel.
The extra capital investment for station construction merely costs Nikola around 30k per truck in the original leasing deal. Not so bad considering diesel fuel stations earn roughly $1 million over the life of a truck just in refuels. Once in place, Nikola hydrogen stations can produce between 8 to 24 tons of green hydrogen a day depending on the location built. I confirmed directly with Trevor as shown in this tweet below.
Each station is designed to be 8 tons a day. You can double or triple that station size. Then you’d have to build a new one after 24 tons due to power constraints.— Trevor Milton (@nikolatrevor) March 4, 2020
3. Products – The three different semi-truck models that Nikola offers will ease the battle of adoption. For North American commercial trips within a 300 mile range, Nikola offers the cheapest solution of battery electric trucks but for longer trips hydrogen is the best solution. Both options refuel within 20 minutes. The Nikola Tre is designed for the European market and offers double the hydrogen capacity of current competitor options.
Beyond commercial application, Nikola is breaking into consumer markets as well. Their new pickup truck, the Badger, will be shown at Nikola World 2020 in September. While EV sedans are already on the road, the market for BEV and HFCEV pickup trucks are not which gives Nikola a chance to set themselves apart from competition in this market as well. Pickup trucks are gaining in popularity overall and have the most functional use which improves resale value.
Ford F-series brand gas motor pickups currently dominate this market, having sold just under 900,000 trucks in 2019 alone. Nikola’s Badger is designed to take on the Ford Raptor model of the F-series. This off-road capable and sporty model pickup will have options to add a hydrogen fuel cell or just electric battery. Being the first of it’s kind, the Badger will be a distinctive contrast to other upcoming alternative fuel pickup producers like Rivian, Workhorse, Atlis, Bollinger, Hummer, Toyota, Ford, and Tesla. To boot, Nikola has a targeted marketing campaign with the Founder’s friend, Heavy D Sparks, from the Diesel Brothers. Product placement is an important component of market adoption.
Nikola also has a power-sports division that is making ATVs for civilian and military use. They even have an electric wave runner with the world’s first wake-board architecture. Exploring niche market products will be a great way to bring in excitement and community support for what this company is striving to achieve in the bigger picture.
If that isn’t enough intellectual property to wow you, Nikola owns a solar division to deploy their own sun farms and even alluded to having game-changing technology about their new battery cells. Innovation and cost efficiency will really bring value to customers in a way that consumers look for in tech brands. Details will be announced at Nikola World 2020 but you can see the new battery press release here for yourself:
4. Growth – Nikola Motor has spent the last several years designing efficient ways to scale this motor and fuel project. Since energy tech is a capital intensive process, they cleverly licensed the Nikola brand to established companies in a trade for equity. Bosch and CNH Industrial (IVECO) are quality OEMs that now back Nikola production. Ryder and Thompson Machinery of Caterpillar will cover sales and service of rigs. Other notable investors include Hanwha, Wabco, and Nel Hydrogen.
Reputable partners increase the rate of acceleration and deter competition; key component to understanding the art of scale.
Nikola further boasts an off-grid headquarters with 3.5 megawatts of solar power on their roof that generates 18 megawatts of electricity a day. The largest hydrogen storage tank in the Western world is also stationed there with roughly 10,000 kilograms of fuel in it. Nikola even installed hydrogen fuel cells for backup power and store their solar energy in battery cells. This display of belief in their own technology is a proper foundation that will serve them well years down the road.
5. Valuation – Finally, to put all these other four points into perspective it is important to measure the difference between cost and value. Nikola Corporation went public at $3.3 billion which I feel is low for how much upside potential is up for grabs. Trevor has already stated that Nikola stopped taking semi-truck orders at $14 billion for the first line and announced on CNBC that something even bigger has been signed to be announced at a later date.
It will be tough to properly measure the value of this company without further details and a few quarters of market performance. So just for quick math let’s assume those orders are processed, nothing else is sold for the next four years and Nikola scrapped all their other products. I know that isn’t the case but I like to make a negative scenario in seeking value.
Assuming the first round of orders process, divide 14 billion over four years and you end up with 3.5 billion per year. If Nikola only made a 10% profit on this first round of truck orders, that still leaves them with $350 million per year. Now if Nikola production is stable enough to show future potential by 2024 their PE ratio should reflect a healthy sentiment with investors. S&P 500 companies historically have averaged around 15x PE which would give Nikola Corporation a rough $5.25 billion valuation with the current orders alone.
Of course Nikola would hopefully have a great run with their consumer products and maintain a better profit margin using their fuel infrastructure model, but I like knowing that I am potentially buying a great stock at juicy discounts.
Another note to consider, full-time truck drivers tend to aim for around 100,000 miles per year. If we low ball the trucking market at 2 million rigs on the road and say they only averaged 75,000 miles per year that still leaves us with 150 billion miles logged per year in freight transportation. If Nikola can capture 5% of the commercial trucking market, that is still 7.5 billion miles a year that Nikola will be earning $1 a mile on.
What if Nikola taps into a higher adoption rate? What if their profit margins are higher? What if competitor trucks use Nikola brand fuel?
Thanks for reading.