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Nikola And Bubble Stocks – Lessons In Investing In 2022

Tim Worstall
Tim Worstall trader
Updated 27 Dec 2021
  • Nikola is a classic example of a bubble stock, something that can be used as a lesson for investing in 2022
  • This doesn’t mean that Nikola won’t work, it doesn’t mean that it will, just that the share price is hugely volatile
  • After all, Tesla started out this way and that has in fact worked

Nikola Corporation (NASDAQ: NKLA) is almost the poster child of a bubble stock. This has lessons for us all as we look to investing strategies for 2022. 

Note that a bubble stock doesn’t mean that the business plan won’t work – the Tesla one arguably has after all. Rather, the description is about being in a sector where the success of the basic idea may or may not happen, specific implementations may or may not work, but there’s vast enthusiasm for the idea. This means that valuations are based upon what might happen – and a corollary is huge volatility as a result of what are objectively very small pieces of information.

It’s also worth pointing out that to the economist, there’s nothing wrong with this. Technological shifts are often accompanied by investment markets that work in this manner. Dotcom had a lot of failures, many fortunes were also made – but we did get real companies like Amazon and Google out of it. The same was true of Railway Mania, or the canal boom and even of Tulipmania – the world’s cut flower market still essentially operates from a few sheds near Schipol Airport. 

Also Read: The Best EV Stocks for 2022

We also can – and should – work back the other way. If something looks like a bubble stock, acts like a bubble stock, then it’s probably not a duck.

Nikola was clearly set up to emulate Tesla’s success – the original Mr. Tesla was called Nikola after all. The base idea is entirely true too. We know of no battery technology – and of no idea that might lead to one – which will make standard battery EVs viable for long-distance trucking and freight operations. If we are to go non-fossil fuel there then fuel cells will have to be the answer. There are alternatives, synthetic hydrocarbons and the like, but fuel cells is a perfectly sensible pathway. 

But then we find a company that really has little more than interesting ideas about what it’s going to do, being valued at billions. They released a video of a truck rolling along and the valuation soared. To not entirely crash when it was revealed that it really was just rolling – downhill, there was no power plant.

Nikola is all about the hope that there’s some excellence inside this adventure. The addressable market is huge, they’re along the right lines, just no one really knows how it’s going to turn out. Could end up with a valuation of hundreds of billions, could be nothing. 

This leads to huge swings based upon very little information. The past couple of weeks have given two examples here. Nikola delivered two test trucks to a port operator. These were short-distance shunters, based upon battery tech, they were free to test vehicles – the stock jumped 7% that day. Deliver a demo not based on your core tech and the corporate valuations jumps $200 million? That’s bubbly. The day before the Xmas holiday breaks a 20% jump in Nikola on the delivery of one truck to a customer, along with the inking of a deal for 100 others elsewhere. This isn’t revenue, nor even proof of concept. It’s just the potential consumer base being willing to try stuff out.

The lesson from this being that Nikola stock is likely to continue being hugely volatile based on mere scraps of news here and there. Actual validation of the business plan in any real sense is some years away. Everything between now and then is going to be driven by pure belief.

It’s a bubble stock, given the definitions being used of that phenomenon. But do note this doesn’t mean that it won’t all work out in the end. In every such investment mania some actually do work out – Tesla, Amazon, Burlington Northern survived the railway mania. 

The difficulty is always in working out which the ultimately profitable survivor is going to be. While we wait for that information the contenders always do trade with massive volatility on the merest hint of information about prospects.   

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.