When I was a kid, my grandfather was fond of reminding me that “a bird in the hand is worth two in the bush.”
What does that mean?
That something you already possess is more valuable than something you think might be better but have a less certain chance of you actually getting.
When it comes to valuing automobile manufacturers, investors today could use a lesson from my grandfather. Let me explain…
Market capitalization shows that today’s investors value hypothetical cash flow much more highly than cash flow that many companies are already producing.
Let me show you what I mean…
A Futuristic Play Already Valued Like a Major Auto Producer
Electric heavy-duty truck maker Nikola Corp. (Nasdaq: NKLA) began trading on the Nasdaq on June 4, 2020.
Founded in 2014, the company has developed a series of all-electric Class 8 trucks that can be powered by batteries or hydrogen fuel cells.
Heavy-duty trucks can haul cement and transport goods around the country on America’s highways.
Nikola’s smaller trucks are powered by batteries and will hit the market in 2021. The company’s larger semitrucks are powered by hydrogen fuel cells and will reach consumers around 2023.
The trucks look cool and are cool. Investors were thrilled with Nikola’s public listing, and the company’s stock price has soared.
With 403 million shares outstanding and a share price that touched $80, Nikola reached a market capitalization of $32 billion within five days of listing.
(A company’s market capitalization tells us what the market believes the entire business is worth.)
So if $32 billion sounds like a big number, that’s because it is a big number.
In fact, at that market capitalization, Nikola is already valued higher than Ford Motor Company (NYSE: F) and Fiat Chrysler Automobiles (NYSE: FCAU).
What’s more, it’s heading toward the valuation levels of Honda Motor Company (NYSE: HMC), BMW (OTC: BMWYY) and General Motors (NYSE: GM).
These are all companies that have been in operation for decades and have the cash flow to support their market valuations.
Much like Elon Musk’s Tesla (Nasdaq: TSLA), which is also a pure play on renewable energy automobiles, Nikola has quickly become an investor favorite. The only difference is that Tesla builds cars (for now) and Nikola builds trucks.
Also, Nikola’s name, like Tesla’s, comes from the eccentric inventor Nikola Tesla.
Given how rich the founders of these two companies have become, I should check to see if Mr. Tesla had a middle name. Maybe I could have a net worth of a few billion if I used Mr. Tesla’s middle name to form a clean energy auto company of my own…
No Revenue, No Profits, No Problem!
Investors buying shares of Nikola today at this lofty $30 billion-plus valuation get a company that generates exactly the following:
- $0 in revenue
- $0 in profits
- $0 in cash flow.
The company has not booked a single dollar in revenue.
According to the company’s own projections, it doesn’t expect to earn its first revenue until 2023. Its $30 billion-plus valuation is based only on birds that might be in the bush.
For perspective, consider that the other big automakers all generate more than $100 billion in sales annually. They have birds in hand.
Nikola has just preorders for future sales.
The company has more than 14,000 preorder reservations for its tractor-trailer trucks, representing more than $10 billion in potential sales.
On June 29, the company will also begin taking preorders for a heavy-duty truck that will compete directly with the highly successful Ford F-150.
Those preorders mean that some revenue will come in, but there is no guarantee that the trucks can actually be built and sold profitably.
Note, I’m not saying they can’t be profitable – I’m just being clear that it hasn’t happened yet.
I’m concerned about the valuation of Nikola’s shares when all the business currently has is a story, not actual cash flows.
I’m also concerned that there is no monopoly on manufacturing renewable trucks and tractor-trailers. There is going to be a lot of competition in this space.
Tesla is moving into electric truck manufacturing, and it competes directly with Nikola. So does Ford, which has an electric F-150 model in the pipeline.
In the coming months and years, I will watch Nikola’s stock and business progress closely. At current valuation levels that are supported only by the promise of future success, I will not be an owner.
That may mean I miss out on an incredible company because I fail to believe in the story (two birds in the bush).
But that is perfectly okay with me. I am comfortable when investing based on fundamentals like cash flow and profitability – birds already in hand.
My grandfather taught me well.