Nikola (NASDAQ:NKLA) stock plunged by nearly 20% Monday morning after the electric vehicle manufacturer filed for the sale of 23 million additional shares. The new shares permit holders of warrants to buy them at $11.50 each, creating fears of a sudden dive in Nikola’s stock price.
Nikola’s stock may not stay low for long. The hype surrounding the electric vehicle producer has been high since its June IPO. This doesn’t change the fact that you may be better off buying Tesla (NASDAQ:TSLA), which has performed better since Nikola’s IPO.
Nikola’s share price has had a good month up until the end of last week. It went public on June 4, priced at about $34. It hit $93.99 on June 9, buoyed by the hype for electric vehicle-only companies generated by Tesla.
Things changed on Friday when Nikola filed a registration with the SEC to sell an additional 23.89 million shares. The company will sell these shares at $11.50 to holders of warrants, which were acquired as part of Nikola’s IPO.
This is bad for NKLA because it will inflate the supply of shares. It will also allow warrant holders to sell lower than they might otherwise have done.
Both of these factors will combine to depress the price of Nikola stock. The market will also be spooked that shareholders don’t believe Nikola will rise.
The market is already spooked. NKLA collapsed to $38.25 within hours of opening on Monday, from $48 on Friday.
It has stabilized at around $39 but could sink further if warrant holders exercise their right to buy just over 23 million shares.
Nikola stock is likely to recover in the medium term. Hype for EV stocks has been extreme this year, with Tesla rising by 257% in 2020.
Even if warrant holders claim the new shares, NKLA will probably bounce back. It has already done that once before.
The stock plunged in early July after early investors took profits on NKLA. It was trading at $65.90 on July 1 before falling $57.18 on July 2 and then $40.23 on July 7. It then began rising shakily again until Friday, when it was priced at $48.84.
The stock may rise again amid signs that investors are already buying the dip.
While NKLA may recover, it’s hard to say whether it will return to previous highs. The company is still at least one year away from producing its first vehicle. Its revenue for 2020 will be zero.
All it has on its books are some non-binding orders for vehicles that don’t yet exist. As veteran short-seller Andrew Left of Citron Research pointed out last month, Tesla had already delivered cars by the time its market cap was the size of Nikola’s.
Investors’ desire to uncover the next Tesla could partly explain Nikola’s stock performance. It also explains the rise of fellow EV-maker Workhorse, which was up 500% in the year to date (now 392%).
As for Nikola, it’s up by only 15.59% since its IPO, while Tesla is up by 73.68%.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.