Why Nikola Stock Crashed in August

Nicholas (NKLA -6.74%) has an aggressive vision to create a network of hydrogen production and fueling infrastructure for the heavy-duty electric trucks it has built and sold. The company focused on a niche use case for short-haul transportation needs near port facilities in North America.

Although he made admirable progress with his plans, the headwinds against the business grew. This has raised fears among investors that the risk-reward balance may not be worth it. The result was a punishing August for Nikola stock.

Nikola shares have fallen 26.2% this month, according to data provided by S&P Global Market Intelligence. With sales rising and the company reporting record revenue in its second-quarter update last month, investors may be wondering if the decline is a buying opportunity or if the stock should just be avoided.

Hydrogen fuel infrastructure

Nikola sold 72 hydrogen fuel cell electric trucks to its wholesale distributors in the second quarter. That, plus the regulatory credits it received for the first time, resulted in revenue of more than $31 million in the second quarter.

But spending also accelerated as they built renewable energy infrastructure, including hydrogen fueling stations, and added mobile fuel trucks. Nikola offers hydrogen fueling through its brand in the energy segment HYLA. Just in the last two months, it opened a new HYLA gas station in Toronto, Ontario, Canada. It also commissioned a modular station in Southern California and doubled capacity at another modular station.

Nikola CEO Steve Girsky summarized the company’s progress in the second quarter, stating:

Our trucks are put to the test every day by the end users of the fleet, transporting goods and delivering to their customers. Q2 is an example of how we are approaching the intersection of mission and reality, and how Nikola is out front, charting the course.

However, building infrastructure and producing more trucks costs money.

Cash is the problem

With sales accelerating, Nikola’s net operating loss improved in the second quarter from a year ago. The company ended the second quarter with $256 million in unrestricted cash. But as CFO Tom Okray noted on the company’s second-quarter conference call with investors, that was $90 million lower than where it started the quarter.

That is why Nikola announced a new capital increase last month. It will raise $80 million through the sale of convertible notes and could double those proceeds with a follow-on offering. The company also requested to allow future security sales that could raise an additional $500 million.

This is a clear signal that existing shareholders will continue to be diluted as the company maintains sufficient liquidity to continue growing its operations. That explains why the stock dropped significantly last month. If Nikola maintains enough capital, it could build enough of an ecosystem of trucks and hydrogen fuel to be successful over the long term, though that’s a bet most investors probably shouldn’t make.