Despite 50% Drop, J.P. Morgan Still Thinks Nikola (NASDAQ: NKLA) Is A Buy

It’s not every day that you hear of a pre-revenue, 6-year-old automotive / tech company outweighing century-old  titans of the industry in terms of market cap but that’s exactly what’s been happening with Nikola Motor Company NASDAQ: NKLA. Since getting onto the NASDAQ exchange last quarter, shares have been going parabolic as headlines and hype have sent investors wild.

In a four week period through the start of June, shares popped 600% as comparisons with Tesla NASDAQ: TSLA were quickly drawn up despite Nikola being months if not years away from having their products, primarily hybrid trucks, on the market.

Surprise Upgrade

As the old saying goes though, what goes up must come down. In the month since they hit an all time high and briefly posted a higher market cap than Ford NYSE: F, shares have fallen more than 50% through Tuesday of this week. Many on Wall Street were surely thinking the bubble had popped and it was time for the company to get back to reality and start justifying the hype. However, a somewhat surprising upgrade from J.P. Morgan on Wednesday sent shares up 34% in a single session, reminiscent of the double-digit percentage jumps that were been seen every week last quarter.

Nikola was moved up to an Overweight rating from Neutral by J.P. Morgan who took a long term view of the company’s potential and encouraged investors to do the same. They noted that the growing fear of the impending sale of stock by the company’s PIPE (private investment in a public entity) investors is nothing more than a short term concern that will be akin to ripping a band-aid off.

As part of the process that Nikola went through to get onto the NASDAQ in May, they underwent a reverse merger with VectoIQ. Part and parcel of this process was the sale of shares to private investors. Upwards of 24 million shares are at risk of being unloaded since they became exercisable last week and this has been unnerving investors.

J.P. Morgan said that while there might be some short term weakness on the back of the PIPE investors and how they act now that their shares are free to trade, they were bullish on other catalysts. In a note to clients, they said  'we expect a number of developments out of Nikola soon, including the announcement of an OEM partner for the Badger truck, an H2 station deployment plan for the UK, potentially accelerated implementation plans for the FCEL truck in the U.S. California’s CARB ACT ruling could lead to accelerated adoption of H2 infrastructure on the West Coast, beyond Nikola’s original plan. We think the stock will react favorably to any developments that shorten and/or de-risk the BEV and FCEL truck implementation plans."

No Revenue, No Worries

This was enough to send investors flooding back in even as shares traded above the $45 price target that J.P Morgan slapped onto them. They’ll need iron stomachs as the road ahead is sure to be bumpy. Case in point, initial pre-orders for the company’s electric pick-up truck, the badger, have been disappointingly low. Nikola’s CEO said last month that the Badger will eventually replace Ford’s flagship F-150, but pre-orders have only averaged around 1,500 a day since then. Compare this to the pre-orders on Tesla’s Cybertruck which were more than 140,000 in the first 48 hours after its launch.

For now, Nikola is little more than a story stock that will ebb and flow as hype builds and then recedes. With a $20 billion market cap and essentially no revenue let alone profits to report, it has a long road ahead to justify this kind of valuation. But to that point, Wall Street has shown time and time again in recent years that it’s willing and able to look far, very far, ahead into the future and to price a stock accordingly.