Stocks to sell

Last month, Nikola (NASDAQ:NKLA) shares cratered in price, following the announcement and completion of a 1-for-30 reverse stock split. However, so far this month, Nikola stock has been bolting out of the stock market junkyard.

Since July 2, this fallen angel of an EV stock has bounced back from its lows, and has climbed back to double-digit prices. On that date, the hydrogen electric truck maker reported better-than-expected delivery numbers for the preceding quarter.

Yet while this latest rally could carry on for several weeks, don’t assume that shares will keep charging back up to past split-adjusted price levels.

Promising news notwithstanding, Nikola remains largely in the same boat as other “also-ran” EV plays. Renewal of concern about key risk could have shares soon reversing course.

Nikola Stock: Why a Deliveries Beat is Driving an Extended Rally

While the Nikola Q2 deliveries news came out last week, this news has made an even larger impact on NKLA’s price performance this week. Shares surged just 8.65% on the date of the deliveries announcement, but on July 8, this same news was likely the main driver behind its nearly 17% rally that day.

So, what’s driving this extended Nikola stock rally? Perhaps, because of the Independence Day holiday in the United States, it took a few days for this promising news to be disseminated across the market. Or, it may be a case of speculators betting on two things playing out that could drive a further rally for the stock.

First, Nikola’s deliveries beat could mean that the company reports better-than-expected fiscal results and guidance, when the latest quarter numbers hit the street early next month.

Second, NKLA is a heavily shorted stock, with around 21.52% of its outstanding float sold short. This makes shares a prime candidate for a short squeeze.

Although it’s likely that Nikola has already been squeezed on the deliveries news, there could be a more substantial scrambling by short-sellers if promising results and guidance come out pre-market on Aug. 2.

Beware: This Rally Could Prove Fleeting

Although it’s possible that the Nikola stock rally carries on through earnings, it’s far from a lock that this happens. Between now and earnings, investor sentiment could shift. How? Mostly, if investor attention turns back to the company’s long standing profitability issue.

Yes, the EV maker delivered 72 vehicles last quarter. Yet while this was 12 units above guidance, that’s still far from enough volume to cover Nikola’s overhead expenses.

Net losses are likely to narrow compared to last quarter, but they may not come in any better than the sell-side current forecasts. Q2 2024 consensus calls for GAAP losses of around $120 million, or $2.70 per share.

If profitability concerns quickly become top of mind again, expect this latest rally to peter out well before Aug 2. Even if the rally continues through earnings day, fairweather fans of the stock could use reported high losses as a reason to sell.

Mostly, because further losses will underscore Nikola’s need to raise additional capital, on dilutive terms. With just $345.6 million in cash on hand at the end of last quarter, the company needs a cash infusion to sustain and further grow operations, within the next few quarters.

Bottom Line

Forget about Nikola being a few quarters away from executing another dilutive capital raise. It’s possible that the company decides to capitalize its recent bounce back to $10 per share, and announce capital raising plans at the time of earnings, or even before the earnings release.

As dilution will water down the value of existing investor positions, expect such news to place pressure on NKLA. The stock could fall back to its pre-rally low of $7.25 per share, or to even lower prices.

Nikola has come a far way from having to roll prototype vehicles downhill to woo investors. This former top EV prospect has at least reached the production and revenue stage.

Yet when it comes to the Nikola stock rally, consider it best to err on the side of caution. Assume that, after charging up the hill in recent weeks, a rolling back down will soon follow.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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