Inflation Data and Fed’s Dual Mandate
Nikola Stock Forecast: Should You Buy or Sell Ahead of the Reverse Stock Split?
Inflation and Employment: San Francisco Fed's Mary Daly on the Dual Mandate
Overview
Nikola (NKLA) stock hit record lows last week following the announcement of a 1-for-30 reverse stock split, the maximum ratio allowable. This move aims to rectify Nikola’s violation of Nasdaq listing rules, as its share price consistently traded below the exchange's minimum threshold of $1. While maintaining its Nasdaq listing is crucial for Nikola, allowing the company to raise cash by selling shares, the reverse stock split might not solve all of Nikola’s problems.
Boom to Bust: The Nikola Journey
Nikola was one of the first green energy companies to benefit from the SPAC boom of 2020, symbolizing the renewable energy excitement. At its peak in 2020, Nikola’s market cap surpassed that of Ford Motor (F), despite not delivering any vehicles. The bubble burst in late 2021, with the EV industry, including Tesla (TSLA) and Rivian (RIVN), facing significant market corrections. Since then, Nikola has regularly raised capital but faced continuous setbacks.
Restructuring Efforts
Nikola has undergone significant restructuring, focusing on core competencies. The company sold its Badger pickup truck program, exited its European joint venture, and announced the liquidation of Romeo Power, acquired in 2022 for $144 million in an all-stock deal.
Management's Strategy for Growth
Nikola’s CFO, Tom Okray, emphasized the need for volume growth to achieve profitability. During the Q1 2024 earnings call, Okray outlined plans to increase volumes by targeting national carriers with large fleets and expanding beyond its primary markets of California and Canada. Despite selling trucks below production costs to build confidence, the strategy aims to scale operations and optimize costs.
Market Analysts' Take
While Wall Street analysts have a consensus "Hold" rating on Nikola, Bryan, Garnier & Co. initiated coverage with a "buy" rating and a $1 target price. Baird also rated NKLA as "outperform" with a $2 target price. Despite the stock trading below the Street-low target price of $0.50, the mean target price of $1.12 suggests potential for significant gains.
Hydrogen Technology Play
Nikola's focus on hydrogen fuel cell electric vehicles (FCEVs) positions it to benefit from the growing hydrogen economy. Hydrogen FCEVs offer higher range and shorter refueling times compared to battery electric vehicles, making them attractive for long-haul trucking. Regulatory support, such as the Inflation Reduction Act of 2022 and EPA Clean Ports Program, further aids Nikola's business prospects.
The company is developing hydrogen infrastructure under the Hyla brand, which could be monetized if the hydrogen industry gains traction. Nikola also expects to generate revenue from sales of particulate matter (PM) credits, with the first agreement expected to be recognized this quarter.
Execution is Key
Despite past challenges, Nikola's CEO, Steve Girsky, emphasized the company's shift to execution rather than planning. The focus is on scaling deliveries and achieving profitability. However, Nikola’s weak balance sheet and need for continuous capital raises pose risks. The company’s outstanding share count has increased significantly since its 2020 listing, indicating potential for further dilution.
Nikola Stock Outlook
Nikola stock, currently at record lows, may seem attractive, but it remains a risky proposition. The company's need for additional capital, coupled with a weak balance sheet, makes it a speculative investment. Investors should consider more stable opportunities within the green energy sector that offer clearer growth and profitability roadmaps compared to Nikola.
Inflation and Employment: San Francisco Fed's Mary Daly on the Dual Mandate
Inflation Data and Fed’s Dual Mandate
As inflation declines toward the Federal Reserve's 2% target, attention may shift to the other part of its dual mandate: full employment. Core PCE inflation retreated to 2.8% in April from over 7% in summer 2022. San Francisco Fed President Mary Daly highlighted the importance of balancing both inflation and employment goals.
Policy Implications
Daly emphasized the need for vigilance and adaptability in achieving the Fed’s goals. She noted that if inflation falls slower than expected, maintaining higher interest rates would be necessary. Conversely, a rapid decline in inflation would warrant rate cuts. Daly sees the potential for managing inflation without triggering a recession, aiming for a balanced approach that supports both price stability and employment.
Economic Outlook
Daly remains cautiously optimistic, noting a strong yet stable labor market. She highlighted the importance of pre-emptive action based on emerging risks and the need for a balanced policy to maintain economic stability.
Conclusion
The Federal Reserve's focus on both inflation and employment underscores the complexity of its mandate. As inflation trends downward, the central bank's policy adjustments will be crucial in ensuring economic stability without sacrificing job growth.