Chronicle Journal: Finance

Nikola vs. ElectraMeccanica: Which Electric Vehicle Stock is a Better Buy?

Investors are eyeing EV start-ups to capitalize on the changing automobile industry. Nikola (NKLA) and ElectraMeccanica Vehicles (SOLO) have emerged as two EV manufacturers with significant potential, given their unique designs and innovative technology. Will NKLA’s state-of-the-art hydrogen trucks dominate over SOLO’s cost efficient one-seater EVs? Read more to find out.

Electric vehicle industry start-ups such as Nikola Corporation (NKLA) and ElectraMeccanica Vehicles Corp. (SOLO) are garnering a lot of attention from investors, given their potential to deliver robust returns over the next couple of years. Unlike industry leaders, these stocks are relatively cheaper, and are likely to generate double or even triple digit returns over the next couple of years.

With most governments phasing out fuel cars over the next couple of decades, NKLA and SOLO have the potential to become industry leaders based on their unique products. While NKLA specializes in hydrogen-powered trucks, SOLO develops single-seater vehicles for multipurpose usage. Thus, with rising demand, a variety of electric vehicles around the world for various purposes from bulk transportation to cost effective urban commuting, NKLA and SOLO have the potential to grow significantly through global expansion. As both companies are still in the developing stage, with commercial production and supply yet to begin, investors can go long on these stocks right now to book in profits when their products hit the markets.

SOLO has gained 286.4% over the past month, compared to NKLA’s 30.5% return. In terms of past three-month performance as well, SOLO is the clear winner with a 292.3% gain compared to NKLA’s negative return.

But which stock is a better buy now? Let’s find out.

Latest Developments

NKLA went public on June 4th through a reverse merger with blank check company Vector IQ. It is currently constructing its manufacturing facilities in Coolidge and Arizona, following which production should begin. The company partnered with IVECO (owned by CNH Industrial) for a $250 million capital infusion in exchange for an approximately 7.11% stake. This should allow NKLA to become a leading Original Equipment Manufacturer (OEM) in the future.

On September 8th, NKLA entered into a strategic partnership agreement with General Motors Company (GM) for $2 billion in exchange for an 11% equity stake. This deal is expected to help NKLA cut down approximately $5 billion in costs over the next 10 years. Earlier this year, NKLA announced the sale of 23.90 million shares following an exercise of warrant.

However, following some fraudulent allegations against CEO and founder Trevor Milton, he stepped down in September.

SOLO began commercial production of its flagship three wheeled SOLO EV for single riders in August this year. The company is also planning to launch a utility and fleet version of SOLO EV, expected to be available by early 2021.

SOLO selected Arizona and Tennessee as two sites for SOLO EV US assembly facility and engineering technical center. This allows the company direct access to the United States EV market without any trade barriers such as tariff expenses, ensuring higher returns for shareholders.

On October 29th, SOLO announced the opening of six retail showrooms across the country within November. This is in addition to the four showrooms already operating in the country. The first batch of SOLO EVs were presented in the Los Angeles Ride and Drive press event. The vehicles are expected to be available for commercial sale by next year.

Recent Financial Results

NKLA reported a net loss from operations of $117,299 in the third quarter that ended September 2020. However, the company maintained a strong liquidity position with a cash balance of $908 million, and a restricted cash balance of $15 million.

NKLA is focused on developing its manufacturing facility in Arizona over this quarter, which is currently on path to become operational by the end of next year. The company plans to begin trial production by the third quarter of 2021 in the Coolidge manufacturing facility in Arizona.

SOLO’s revenue increased 50% year-over-year to C$0.30 million in the third quarter that ended September 2020. Cash and cash equivalents balance improved 810.8% over the last two quarters to $101.10 million.

Past and Expected Financial Performance

NKLA’s revenue and EPS increased 178.6% and 63.6%, respectively, year-over-year. SOLO’s revenue and EPS, on the other hand, rose 28.5% and 10%, respectively, over the same period. NKLA’s EBITDA increased 19.6% year-over-year, while SOLO’s EBITDA grew 30.3% year-over-year.

NKLA’s EPS is expected to rise at a rate of 20.6% per annum over the next five years. Analysts expect revenues to increase 48,870% in 2021.

On the other hand, analysts expect SOLO’s EPS to rise 18.3% in the current year, and 6.1% next year. The company’s revenue is expected to grow 13.4% in the current year, and 2,540.3% next year.

Valuation

In terms of trailing 12-month Price/Sales, NKLA, currently trading at 21158.27x, is 96% more expensive than SOLO, which is currently trading at 833.47x. NKLA is also more expensive than SOLO in terms of trailing 12-month EV/Sales (72175.80x versus 1234.37x) and Price-to-Book ratio (10.46x versus 9.81x).

POWR Ratings

SOLO is rated a “Buy” in our proprietary POWR Ratings system, while NKLA is rated a “Sell”. Here’s how the four components of the POWR Ratings are graded for both these stocks:

SOLO has an “A” for Trade grade and Industry Rank, and a “C” for Buy & Hold Grade and Peer Grade. It is currently ranked #23 in the Auto & Vehicle Manufacturers industry.

NKLA has an “A” for Industry Rank, a “C” for Trade Grade, a “D” for Peer Grade, and an “F” for Buy & Hold Grade. It is currently ranked #25 out of 33 in the same industry.

The Winner

Ever since NKLA’s CEO Trevor Milton stepped down, following accusations of misleading investors regarding the performance of NKLA trucks and the progress in the production level, the company has been struggling. Even with its strategic partnerships and extensive manufacturing facilities, the concept of hydrogen-powered vehicles is relatively new to the masses, as no other company has hydrogen fuel cell powered vehicles in the market. Tesla, Inc. (TSLA) CEO Elon Musk has publicly stated the flaws in the mechanism, raising further questions regarding the efficacy of upcoming Nikola Badger trucks. NKLA is yet to launch a prototype vehicle to demonstrate its efficiency and sustainability.

SOLO, on other hand, has launched the prototype of its proprietary vehicle in the market, and has offered testing facilities to major media outlets during the unveiling event. The company is on track to begin commercially selling its vehicles by the end of this year. Thus, SOLO is a better pick here.

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NKLA shares were trading at $35.43 per share on Tuesday afternoon, up $6.02 (+20.47%). Year-to-date, NKLA has gained 243.32%, versus a 14.42% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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