Electric-truck manufacturer Nikola (NASDAQ:NKLA) was a popular topic among traders because the firm went public through a SPAC, or special-purpose acquisition firm. From the beginning, Nikola stock traders quickly purchased to the SPAC hype together with the mania surrounding the electric-vehicle sector.
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In all honesty, a few of the excitement surrounding the Nikola SPAC was a result of the concurrent run-up in Tesla (NASDAQ:TSLA) shares. At some point, the motions from Nikola stock almost exactly reflected the price moves in Tesla stock.
Some wary investors were worried that the first run-up in Nikola stock wasn’t sustainable. These concerns were quite sensible and the stocks did really lose a lot of the value in July.
Is that a reason to give up on Nikola entirely? Not automatically. Momentum-focused dealers most likely don’t enjoy what they’re seeing from the price activity. However, long-term traders can see Nikola stock via a contrarian lens and therefore discover a compelling reason to have the stocks.
A Closer Look in Nikola Stock
I love InvestorPlace contributor Tezcan Gecgil’s overview of Nikola stock’s first couple of days after being listed on the Nasdaq. As Gecgil place it, “Nikola stock started trading on June 4 when it opened at a price of $37.55. On June 9, it hit an intraday all-time high of $93.99.”
That should provide you a reasonable idea of hype could fuel a crazy share-price rally. Nikola stock is a textbook example of an advantage moving too much, too quickly and too premature according to “irrational exuberance” (to borrow a word from Alan Greenspan).
Suffice it to state at July’s conclusion, Nikola stock was trading in just $30 each share. That’s quite a comedown from the high of nearly $94. Value-focused investors were worried initially, but it’s the momentum dealers which may abandon the boat.
Dumping the stocks might end up being a mistake, however. In case Nikola stock was great at $90 or $60, then it ought to be excellent at $30. It’s not emotionally simple to purchase stocks if they’re falling, but as they say, “No pain, no gain.”
A Warrant for its Stock’s Arrest
So, what precipitated the sharp drop in Nikola stock? Can it be nothing more than the popping of a hype-fueled talk -price bubble?
That’s likely a contributing element. However, there may are another factor at play . It’s a phenomenon which may be predicted “warrant vesting.”
Warrants give individuals and associations who have them the right to buy shares of a stock in a discount. In that regard, they’re somewhat like in-the-money call-option contracts.
In the event of Nikola, 24 million warrants recently qualify for exercise in the very reduced price of $11.50 each share. If you’re a retail dealer reading this, odds are excellent that you had a opportunity to have Nikola stock at the price.
The Worst Isn’t So Bad
As we’d expect, a flood of merit vesting happened as the Nikola share price jumped far over $11.50. The large scale exercise of those warrants probably brought the stock price down.
Hopefully, the majority of the warrant-vesting actions ought to be over by today. What retail transactions are left with is a deeply discounted stock and also a business that’s not any worse than it was then stocks were near $94.
RBC analyst, Joseph Spak, sees $20 since the worst-case situation for Nikola stock. That might indicate a 50% decrease in the present conversation price, that isn’t even that bad for a speculative stock that’s experienced a drawdown of two-thirds.
In any case, Spak still appears to enjoy the SPAC (sorry, I couldn’t resist that one). He gave Nikola stock the equal of a “hold” rating together with a price goal of $46.
The Main Point
In the conclusion of the afternoon, investors at electric-vehicle start-ups such as Nikola will have how to learn to bear volatility. Or, they can simply purchase Nikola stock, hold it to the long run, and extend from viewing the moves in the talk price. Come to think about it, that could be the best way whatsoever.
For this writing, David Moadel didn’t maintain a position in any of the above securities.