JPMorgan upgrades controversial Nikola after 40% sell-off, says it's attractive for long term

Published Wed, Jul 8 20208:15 AM EDTUpdated Wed, Jul 8 20204:11 PM EDT

(This story is for CNBC Pro subscribers only.) JPMorgan told clients to buy Nikola , the controversial electric vehicle SPAC popular with retail investors, after a massive sell-off pushed the stock price below the bank's price target. The analyst also cited several potentially bullish catalysts. The maker of battery-electric and hydrogen-powered trucks went public just a month ago through a special purpose acquisition company and has experienced a 40% plunge in share prices this month. The company has raised eyebrows because of its popularity among new investors on platforms such as Robinhood despite the fact that it hasn't delivered a single vehicle for customers. Nikola has said it doesn't plan to have revenue until 2021. The sharp drop led JPMorgan to raise its rating to overweight from neutral. "NKLA stock is now trading below our $45.00 price target and starting to look attractive for long-term investors in view of a number of potential positive catalysts in coming weeks and months," JPMorgan analyst Paul Coster said in a note Wednesday. "In our view NKLA is currently a story-stock, but we are on board as long as the company executes to plan, and providing the stock offers a favorable risk-reward trade-off," Coster added. The bank initiated its coverage on June 22 with a neutral rating, saying the stock was fully valued. Coster kept his $45 price target unchanged, which represents a 10% gain from Tuesday's close of $40.23. Shares of Nikola soared 34.3% on Wednesday following the upgrade. There could be several positive drivers for Nikola on the horizon, including partnerships and regulatory reliefs, JPMorgan said. "We expect a number of developments out of Nikola soon, including announcement of an OEM partner for the Badger truck, an H2 station deployment plan for the UK, potentially accelerated implementation plans for the FCEL truck in the U.S. California's CARB ACT ruling could lead to accelerated adoption of H2 infrastructure on the West Coast, beyond Nikola's original plan," Coster said. The company, founded in 2015, began trading on June 4 after a reverse merger with VectoIQ, which is a publicly traded SPAC headed by former General Motors Vice Chairman Stephen Girsky. Still, JPMorgan expects heightened volatility for Nikola stock in the near term due to its high trading volumes and the SPAC shares from the reverse merger. "NKLA trading volumes are very high despite limited float at present, so we believe the stock movement is largely driven by short-term traders," Coster said. "We sense that the stock will remain volatile until the SPAC shares are registered and the warrant calls are exercised (by the company), which could lead to some additional selling (easily absorbed by current trading volumes), and then some degree of stabilization as the stock finds its way to higher conviction investors."

Nikola Motor Company

Source: Nikola Motor Company

(This story is for CNBC Pro subscribers only.)

JPMorgan told clients to buy Nikola, the controversial electric vehicle SPAC popular with retail investors, after a massive sell-off pushed the stock price below the bank's price target.

The analyst also cited several potentially bullish catalysts.