How Nikola Makes Money: hydrogen-electric trucks and sports vehicles.

Nikola Corp. (NKLA), which designs and plans to manufacture hydrogen-electric trucks, first became a publicly traded company earlier this year. Its shares more than doubled within days of completing a reverse merger in early March with VectoIQ Acquisition Corp., which was listed as VTIQ on the Nasdaq prior to the deal. Its stock price has had some incredible rises and falls since then.

After the merger on March 3, VTIQ’s stock rose from around $10 to around $34 on June 4, the day the combined entity’s stock started trading as NKLA. The stock then shot up, more than doubling before hitting its peak at nearly $80 on June 9. Excitement on the stock cooled and the stock dropped substantially in July, back down to the low thirties before recovering to and rising up to $50 after it announced a partnership with General Motors to help build and develop its Badger hydrogen-powered truck.   

Then on September 10, short-selling firm Hindenburg Research released a report alleging that Nikola and its founder, Trevor Milton, had lied extensively about the kind of technology Nikola had. Nikola has called the accusations “false and defamatory.” By September 15, the SEC and Justice Department announced they’d be investigating Nikola over the allegations. On September 20, founder, Trevor Milton announced he was resigning as chairman. The status of the company’s deal with GM is uncertain. Nikola’s stock dropped from $42 a share on September 9, down to the low teens by late September and trades at $21.18 as of market close on November 13, 2020.

The Reverse Merger

Nikola first announced it had agreed to a deal with VectoIQ, a publicly-traded special purpose acquisition company (SPAC), in early March. As a SPAC, VectoIQ was founded in 2016 for the purpose of carrying out a merger, asset acquisition, or other similar business combination with one or more businesses.  Such companies, also known as “blank check companies“, typically raise funds through an initial public offering (IPO) without having any established business plan in place. VectoIQ raised $200 million through an IPO in May 2018.

The reverse merger enabled Nikola to raise more than $700 million, between a private stock placement and the cash from VectoIQ’s trust account, all without having to incur the costs in time and money associated with the IPO process.  IPOs can take a year or more to complete and they’re expensive: underwriters may charge fees between 4% and 7% of gross proceeds and offering costs directly attributable to the IPO can run as high as $4.2 million, not to mention the legal and accounting fees. A company can often go public in as little as 30 days with a reverse merger, and often more cheaply than with a conventional IPO.

Leadership and Business Model

Nikola was founded by Trevor Milton in 2015. He named the startup after Nikola Tesla, taking the famous inventor’s first name—the last name was already taken. Before founding Nikola, Milton was CEO of dHybrid Systems, which developed compressed natural gas fuel systems. Milton served as CEO until the merger with VectoIQ when he moved to the position of executive chairman. He was replaced as CEO by Mark Russell. Russell joined Nikola as president in 2019 and has over 20 years of experience in the manufacturing industry. Before he came to Nikola, he had most recently worked as COO and president of Worthington Industries, a steel products manufacturer specializing in pressurized gas cylinders. After the allegation in the Hindenburg Research report that he had lied about Nikola’s technology to investors, Milton quit on September 20. He was replaced as executive chairman by Nikola board member and former GM vice chairman, Stephen Girsky.  

Unlike electric carmaker Tesla Inc. (TSLA), which uses electric cars that are recharged by plugging them in, Nikola plans to build vehicles that use hydrogen fuel cell technology. Hydrogen fuel cells produce electricity by combining hydrogen stored in a tank with oxygen from the air. Hydrogen fuel cell vehicles have similar benefits to pure electric vehicles, but take less time to recharge and have a longer range. Tesla’s founder and CEO Elon Musk has criticized hydrogen fuel cell vehicles, calling the idea “mind-bogglingly stupid,” but many senior auto executives believe that such vehicles have a better long-term future than pure electric cars.

Hydrogen fuel cells are not new technology, but they have previously been too costly for widespread use. Those costs have come down and are projected to fall even further in the future. In January, the Hydrogen Council, an industry group advocating for the use of hydrogen energy, forecast that the cost of hydrogen production and distribution could fall as much as 50% by 2030. The Council said that it would make “hydrogen competitive with other low-carbon alternatives and, in some cases, even conventional options.”

One of Nikola’s major initiatives, and one of the reasons it was looking to raise cash, is so that it could begin the roll out its hydrogen station infrastructure. Producing hydrogen-electric trucks with zero emissions is just one aspect of the business. Those trucks will need hydrogen refueling stations, and Nikola plans to build such stations throughout North America. Nikola plans to use solar power at its fueling stations which will be supplemented with grid power. The electricity will then be used to perform “hydrogen electrolysis,” basically running electricity through water to split the water into oxygen and hydrogen, the latter of which can then be used as fuel. In addition to trucks, the company plans to manufacture hydrogen-electric sports vehicles, such as jet skis and off-road 4x4s.

Nikola’s Financials

Like many young companies, Nikola is not profitable and likely won’t be for a number of years. Indeed, the company has yet to deliver a single truck, nor does it have a factory for manufacturing them. Some of the cash raised in the merger with VectoIQ is slated for building a factory in Coolidge, Arizona. Nikola said that it has more than $10 billion in pre-order leases lined up. The company doesn’t expect to start generating revenue from its products until it rolls out a conventional battery-electric truck in 2021, followed by sales for its main hydrogen fuel cell electric truck in 2023.

The little bit of revenue that Nikola has generated over the past three years, including $0.5 million in 2019, has been exclusively from small scale solar installation projects. But the company doesn’t expect these activities to generate meaningful revenue in the future. With costs and expenses far in excess of those revenues, Nikola generated a net loss of $88.7 million in 2019. The company’s net losses in 2018 and 2017 were $64.3 million and $17.6 million, respectively.

On November 9, 2020, Nikola released its second quarterly earnings report since its merger with VectoIQ. It reported a net loss of $117.5 million, or net loss of $0.31 per share, for Q3 2020, which ended September 30, 2020. Nikola said that it began preliminary earthwork on the site for its manufacturing facility in Coolidge in August. The completion of its Phase 1 assembly shop is currently on track to be completed near the end of 2021.