Nikola Corporation (NKLA), in Phoenix, Ariz., operates as a technology innovator and integrator that develops energy and transportation solutions in the United States. NKLA shares have slumped 46.1% in price over the past year and 35.3% year-to-date to close yesterday’s trading session at $9.88. The stock is currently trading below its 50-day and 200-day moving averages and near its 52-week low, which it hit on August 16.

The company is grappling with supply chain disruptions and cost pressures. Due to supply-chain bottlenecks and inflation, the cost of clean trucks is currently higher than diesel vehicles. "It's really a rotten time to have the costs go up," Nikola CEO Mark Russell complained. The rising prices are proving to be a severe headwind for a money-losing startup like NKLA. Furthermore, the company faces intense competition from well-capitalized truck manufacturers and rival newcomers. NKLA cut its financial outlook for the year in August.

The recently identified omicron COVID-19 variant has increased investors' anxiety. Investors' anxiety rose after the CEO of Moderna Inc. (MRNA) voiced concerns over the effectiveness of current vaccines. Furthermore, if lockdowns are reinstated, it could severely hinder NKLA’s growth trajectory. Over the past five days, the stock has declined 5.5% in price.

During the third quarter, NKLA made significant progress in validating the Nikola Tre BEV in preparation for public release and has entered strategic partnerships to continue expanding its network. However, the company’s bleak financial position is a concern.

Here is what could shape NKLA’s performance in the near term:

Stretched Valuation

In terms of forward EV/Sales, NKLA is currently trading at 1,292.61x, which is 67,673% higher than the 1.91x industry average. Also, its 1,574.48 forward Price/Sales ratio is 98,944.7% higher than the 1.59 industry average. NKLA’s 5.24x forward Price/Book is 78.4% higher than the2.94x industry average.

Poor Financials

NKLA’s loss from operations increased 131.8% year-over-year to $271.83 million in its fiscal third quarter, ended September 30. Its net loss attributable to common stockholders grew 235.7% from its year-ago value to $267.57 million. The company’s non-GAAP loss per share was $0.22, indicating a 37.5% increase year-over-year. In addition, the company’s EPS is expected to decline 82.4% in the current quarter, 121.4% in the next quarter, and 40.3% in the current year. Also, analysts expect its EPS to remain negative until the next year.

POWR Ratings Reflect This Bleak Prospects

NKLA has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Quality. This is justified because the company’s negative 75.33% and 67.29% respective ROE and ROA are substantially lower than the 13.58% and 5.16% industry averages.

NKLA has an F grade for Value, which is in sync with its stretched valuation.

Of the 64 stocks in the F-rated Auto & Vehicle Manufacturers industry, NKLA is ranked #59.

Beyond what I have stated above, you can also view NKLA’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Auto & Vehicle Manufacturers industry here.

Click here to check out our Automotive Industry Report for 2021

Bottom Line

NKLA is expected to benefit from the growing EV market and the recently enacted infrastructure act. However, supply chain bottlenecks and the newly identified COVID-19 variant pose a threat to the company’s growth trajectory. Furthermore, its weak bottom line is a concern. The stock looks overvalued at its current price level. So, given its negative ROE and analysts' expectation of negative earnings growth, we think the stock is best avoided.

How Does Nikola Corporation (NKLA) Stack Up Against its Peers?

While NKLA has an overall POWR Rating of F, one might want to consider investing in the following Auto & Vehicle Manufacturers stocks with an A (Strong Buy) rating: BRP Inc. (DOOO) and Mazda Motor Corporation (MZDAY).

NKLA shares were trading at $9.29 per share on Friday afternoon, down $0.59 (-5.97%). Year-to-date, NKLA has declined -39.12%, versus a 22.16% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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