Nikola Stock Could Have A Wild Week As Holders Exercise Warrants
By Al Root
Updated July 20, 2020 8:50 am ET / Original July 19, 2020 1:12 pm ET
Courtesy Nikola Investors should get ready for a volatile week of trading in shares of the heavy-duty fuel-cell trucking pioneer Nikola. Stock warrants—issued in some of the transactions that eventually brought the company to public markets—can now be exercised. Shares tanked Friday on the news, but investors might have reacted too negatively.
Nikola (ticker: NKLA) shares fell 7% Friday during regular trading hours, and lost another 14.5% in after-hours trading once the company said warrants were finally exercisable. Shares are down more than 17% in premarket trading Monday, extending Friday’s declines.
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The warrants essentially create a slug of new Nikola stock that likely will be sold to lock in profits.
The warrants in question give the holder the right to buy one share of Nikola for $11.50—a bargain with the stock trading at almost $49 a share. The warrants, like the stock, trade freely, and closed at $24.62 Friday.
Potential Profit
Implied Profit Buying Nikola Warrant,Exercising It, Then Selling Stock ReceivedAt Nikola Shares Market Price
Sources: Bloomberg, Barron's calculations
.a share
July 2020
0
10
20
30
40
$50
The cost of a warrant and the $11.50 required to buy a share totals $36.12, leaving a profit of $12.72 if the warrant exercisers can unload the new stock received at Friday’s closing price of $48.84. It’s a quick, substantial profit for anyone recently buying warrants.
But that’s only part of the warrant story. About 11.5 million Nikola shares have been borrowed and sold short. Some of the short sales were likely made by warrant holders looking to lock in profits. When the warrant holders get stock, they will use it to replace the shares borrowed.
About 24 million warrants are outstanding. That’s more than the number of shares sold short, although it’s hard to know precisely the number of shares sold short as that data is updated only twice monthly. And there are other ways to execute a similar lock-in strategy, including through the use of put options.
The impact that warrant exercise has on Nikola stock might not be as bad as feared. What’s more, warrant exercise brings new cash in to company coffers—more than 270 million if all the warrants are exercised. Still, shares should still be volatile this coming week.
That’s nothing new for Nikola shareholders. Since early March, when Vectoiq, a special-purpose acquisition vehicle, or SPAC, announced plans to merge with Nikola, shares have ranged widely in price, from about $10 to more than $90. A SPAC is a so-called blank-check company founded to make acquisitions.
Since announcing plans to buy Nikola, Vectoiq stock—which now trades as Nikola—is up about 325%. The Dow Jones Industrial Average and S&P 500, by comparison, are up 3.3% and 7.1%, respectively, over the same span.