While “record highs” were normal for broader markets in the first half of 2024, the opposite seems to be the case for almost all green energy startups, which regularly fell to new lows. Nikola NKLA perhaps deserves a special mention and will play an important role when a post-mortem of the electric vehicle (EV) bubble is one day written.

As one of the first green energy companies to benefit from the Special Purpose Acquisition Company (SPAC) boom in 2020, Nikola became a poster child for the renewable energy euphoria – just like GameStop GME was for the meme stock mania.

At its peak in 2020, Nikola’s market capitalization surpassed that of Ford Motor F – which may have been the first warning of an impending bubble in the electric vehicle industry, as Nikola had not even started delivering its vehicles at the time.

Nikola stock has been in freefall ever since and now has a market cap of under $350 million. The company will report its second-quarter results on Friday. Here’s what the markets expect from the report and whether Nikola stock is worth the risk.

Nikola Q2 earnings preview

Analysts expect Nikola to report revenue of $24.6 million in the June quarter, up 60.5% from the same quarter last year. The company sold 72 Nikola Class 8 hydrogen fuel cell trucks to wholesale customers in the second quarter, above the high end of its forecast.

According to consensus estimates, the company will report a net loss of $120.6 million in the second quarter – a 13.4% increase year over year. Green energy startups reporting losses is nothing new, and most of them have reported massive losses and high cash burn. This meant having to turn to the capital markets to raise money – something Nikola has done quite frequently.

Nikola has been selling shares at a rapid pace, causing a steep increase in the number of shares outstanding. When Nikola starts making a profit, those profits will be spread across the much larger number of shares, dragging down earnings per share.

NKLA wants to increase volume

But turning a profit isn’t exactly the most important thing for Nikola’s management. The team is fighting for survival and completed a reverse stock split in June to meet the minimum requirements for public listing. In fact, management has indicated it’s willing to compromise on pricing to boost initial sales.

During Nikola’s first-quarter 2024 earnings call, CFO Tom Okray emphasized, “Profitability will not be where we want it to be until we can achieve economies of scale. Simply put, it is not practical to optimize our cost structure without a meaningful level of volume.”

While Tesla TSL – with its industry-leading margins – had the luxury of putting volume over margins, unfortunately Nikola – with its constant losses and weak balance sheet – is in trouble and does not have the privilege of a Tesla.

NKLA Stock Forecast

Nikola is actively covered by only 5 analysts, and only 1 of them rates it as a Strong Buy, while 4 call it a Hold. However, its average target price of $18.01 is over 145% above Wednesday’s closing prices.

While Nikola has reshaped its business and is focused on commercializing its hydrogen truck while building a hydrogen infrastructure in North America under the Hyla brand that it can later monetize as the hydrogen industry gains traction, the company has a first-mover advantage in Class 8 green trucks in North America and can become a multibagger if it can successfully sell its trucks at scale.

Key risks Nikola investors should watch out for

Still, there are several risks that Nikola investors should watch out for, starting with execution. The company needs to successfully sell its hydrogen trucks, a technology that some, including Elon Musk, are not too optimistic about.

The second risk for Nikola could be the possibility of a Donald Trump election victory, as his energy policies prioritize the fossil fuel industry over green energy. Regardless of who is in the White House, the transition to cleaner fuels is an ongoing process, although policy actions could accelerate or slow this change.

The third risk for Nikola investors is its weak balance sheet and recurring cash burn, which puts the sword of bankruptcy hanging over the company. Given recent bouts of volatility in the markets, financially weak companies may not be popular with investors, as they can fetch bargain prices for quality stocks.

Although Nikola does not appear too expensive with a price-to-sales ratio of 1.66 over the next 12 months, I would still avoid the troubled company overall, even though the risk-to-reward ratio now looks favorable for investors with a high risk appetite.

On the date of publication, Mohit Oberoi had a position in: TSLA, F. All information and data in this article is for informational purposes only. For more information, please see Barchart’s disclosure policy here.