In terms of popular but speculative penny stocks, it doesn’t get any more exciting and simultaneously risky than commercial electric-vehicle manufacturer Nikola (NASDAQ:NKLA). Initially entering the EV space as a competitor to Tesla (NASDAQ:TSLA), Nikola has suffered a remarkable fall from grace. Even though the enterprise is attempting to turn over a new leaf, it’s difficult to get rid of first impressions. Therefore, it’s probably best to stay away from NKLA stock.
Yes, Nikola saw a 13.16% lift in its equity value on Monday. In some ways, the move was predictable given last week’s horrendous loss — an extreme selloff brought about by bankruptcy concerns. According to The Wall Street Journal, the EV manufacturer has been working with law firm Pillsbury Winthrop Shaw Pittman to explore restructuring options. Among possible avenues is a potential sale or Chapter 11 protection.
Despite obvious risks, speculation over bankruptcy can create temporary opportunities. No matter how poorly an enterprise conducts its operations, it’s rare for businesses to lose their entire valuation in a single shot. Instead, shares crumble, then sometimes pops higher in a move known as a dead-cat bounce. However, such activity is usually short-lived.
Another factor to consider is the short interest. Right now, NKLA carries a short interest of 24.93% of its float. That’s wildly high. Should the security move upward instead of down, short traders have an incentive to close their positions before they suffer excessive losses.
The thing is, in order to close a short position, one must buy back the shares borrowed to initiate the bearish trade. Obviously, a panicked influx of covering shorts would be bullish for NKLA stock. Still, speculators shouldn’t hold their breath.
In the first order of business, while the high short interest is certainly a risk factor for a so-called short squeeze to materialize in NKLA stock, panicked upside is not guaranteed to happen. It’s even somewhat difficult to assign a strong probability to such a scenario. That’s because the short interest ratio sits at just a hair over one day to cover.
The short interest ratio references how long — based on average trading volume — it would take for bearish traders to unwind their short exposure. To bet on a short squeeze materializing, you’d ideally want to see both short interest and the underlying ratio to shoot skyward. As circumstances stand now, the bears can easily exit from their short positions quickly.
Second and on a more pressing note, the financial structure of Nikola is quite poor. As of the latest data, the EV manufacturer sits on only $200.45 million in total cash. However, the total debt load is almost $353 million. What’s worse, Nikola’s vault isn’t going to hold up for long without likely painfully dilutive actions.
Currently, the company’s levered free cash flow (on a trailing-12-month basis) sits at $411.21 million below parity. It needs serious help in order to prevent an utter implosion. Unfortunately, it’s difficult to see where this lifeline will come from, making NKLA stock more akin to a money pit.
