Nikola Stock Erases 2023 Losses on BayoTech Deal and Short Squeeze

Nikola stock (NYSE: NKLA) has rallied handsomely over the last week and has now erased its 2023 losses. Here’s what’s driving the rally in the beaten-down electric vehicle (EV) stock.

Earlier this week, Nikola signed an agreement with BayoTech under which the latter would buy up to 50 Nikola Class 8 hydrogen fuel cell vehicles.

The sales would be spread over five years and the first 12 of these would be delivered between 2023 and 2024. As part of the agreement, Nikola would “purchase low-carbon hydrogen from BayoTech’s Missouri and California hydrogen hubs and up to 10 BayoTech HyFill™ transports for bulk hydrogen delivery to customer refueling stations.”

NKLA stock rallies on BayoTech deal

In his prepared remarks, Nikola CEO Michael Lohscheller said “BayoTech’s low-carbon hydrogen fuel and transport equipment will play an important part in supporting the adoption of Nikola’s Class 8 fuel cell electric zero-emission trucks.”

Nikola stock rallied after announcing the BayoTech deal. A possible short squeeze also seems to have helped the stock move higher as according to FactSet its short interest is 25% – well above the average short interest for S&P 500 stocks.

Short squeeze rallies are not uncommon and were especially at play in the meme stock mania of 2021 where buying spree from retail traders catapulted names like GameStop and AMC to astronomical heights.

NKLA short squeeze

Commenting on the spike in Nikola stock, Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners LLC said, “For now, long buyers are behind the steering wheel.” He added, “If Nikola’s stock price continues to rise — expect the short squeeze to tighten, more short covering and the short-side to have a greater effect on NKLA’s stock price in the future.”

Notably, the rally in NKLA stock has dented the profits that short sellers made in 2023 and they have lost around $176 million in profits over the last 30 days, according to a Bloomberg report.

Meanwhile, thanks to the splendid rally over the last week, Nikola’s stock price is now comfortably above $1. The company has received a delisting notice from Nasdaq for not meeting the minimum listing requirements.

The Nasdaq listing rules mandate that stocks should have a closing price in excess of $1 for 30 consecutive business days.

If a stock is not in compliance with the listing rules it gets a delisting warning from the exchange. To be sure, Nikola is not the only company that has got the warning. In the EV space only, Arrival, Canoo, and Lordstown Motors also received delisting warnings from the exchange for not satisfying the minimum listing conditions.

Nikola has only delivered a handful of vehicles

Nikola has only delivered a handful of trucks so far and in the second quarter of 2023, its retail deliveries were 66 while wholesale deliveries were 45. While the deliveries increased considerably from the first quarter, they are still quite modest.

Lohscheller said, “It is not easy being a pioneer in the zero-emission Class 8 truck space, but we are witnessing a remarkable surge in momentum.”

He added, “We take great pride in our current achievements and the influx of orders coming in for our soon-to-be-produced hydrogen fuel cell electric truck. I believe there has not been a better time to be at Nikola as we move forward, together.”

EV troubles mount

Between 2020 and 2021, loss-making companies were able to raise capital quite easily due to the availability of easy money.

Now, as Fed has raised rates to multi-year highs, startups face a funding winter. Even some of the listed names are facing trouble raising funds as not many investors are willing to back perennially loss-making companies with unproven business models.

Also, raising capital also leads to dilution for existing stockholders, especially in the current environment where many EV companies have raised cash by selling shares at depressed valuations.

Incidentally, earlier this week, Evercore ISI suspended its rating on Nikola, and among others, it blamed the uncertainty over the timing of “significant capital raises” for its decision.

Nikola is looking to raise more capital

Nikola has now rescheduled its annual meeting to August 3 as it has failed to get the shareholder nod twice to increase the authorized share count. The company expects to be third time lucky – thanks to a proposed amendment to Section 242 of the Delaware General Corporation Law which is expected to be effective from August 1.

According to Nikola, “Once effective, the voting threshold for approval to amend a company’s certificate of incorporation to increase the number of authorized shares would change from a majority of the outstanding common stock to a majority of the shares actually voting on the proposal. Under this proposed new law, if the annual meeting were to be held today, a sufficient number of shares would have been voted in favor of Proposal 2.”

EV bankruptcies

When Nikola went public in 2020, it was among the first EV SPACs (special purpose acquisition companies). At its peak in 2020, the company’s market cap was in excess of $30 billion and it surpassed Ford’s then valuation.

It was among the early signs of an impending bubble in EV stocks. However, thanks to the Fed’s accommodative monetary policies and scores of SPACs hunting for EV targets, the bubble continued to build and only got bigger by the end of 2021.

The SPAC bubble has since burst and many de-SPACs, or the companies that went public through SPAC reverse mergers are now fighting for survival.

Many startup EV companies are finding it hard to survive and last month Lordstown Motors filed for bankruptcy.

Making EVs is a capital-intensive business and companies post losses in the initial years. Even Tesla took over 15 years to turn sustainably profitable. With the EV competition increasing with every passing day, the troubles might continue to mount for loss-making startup companies especially as the funding environment continues to deteriorate.