The company will conduct a big reverse stock split next week. Here’s why that’s worrying investors.
Shares of electric truck maker Nikola (NKLA -31.46%) were trading sharply lower on Thursday morning, after the company said in a regulatory filing that that it will conduct a 1-for-30 reverse stock split next week.
As of 10:30 a.m. ET, Nikola’s shares were down about 23.3% from Wednesday’s closing price.
EV truck maker Nikola is planning a 1-for-30 reverse stock split next week. Image source: Nikola.
Nikola’s reverse stock split will be more dramatic than expected
The upcoming reverse stock split isn’t exactly a surprise for shareholders, but a key detail is new. At Nikola’s annual meeting on June 5, shareholders approved a proposal allowing Nikola to conduct a reverse stock split at a ratio between 1-for-10 and 1-for-30.
The decision to do a 1-for-30 split, the most aggressive allowed under the passed proposal, was made by Nikola’s board of directors last week and revealed in an Securities and Exchange Commission (SEC) filing on Thursday morning.
The split will be effective immediately after the U.S. markets close on June 24, next Monday.
Why Nikola’s reverse stock split isn’t a good sign
Reverse stock splits aren’t generally bullish. They’re typically done when a company’s share price falls below $1 for an extended period. Nikola’s stock hasn’t closed at $1 or above since April 9.
Nasdaq requires companies listed on its exchange to maintain a minimum share price of $1. If a company’s share price falls below $1 for 30 consecutive trading days, the exchange sends the company a formal notice that it has 180 calendar days to get back in compliance. If it doesn’t, it can be delisted.
There are two obvious ways for a company to get back into compliance: Announce news that sends the stock price soaring, or conduct a reverse split.
Nikola’s decision to conduct a reverse split, and specifically a 1-for-30 reverse split rather than a 1-for-10 split (or something in between), suggests the board of directors doesn’t see the truck maker’s stock price soaring on its own anytime soon.
That, together with some investor nervousness following electric vehicle start-up Fisker‘s bankruptcy filing earlier this week, is probably why Nikola’s stock is down sharply today.