Nikola Corp (NASDAQ: NKLA) is off to an interesting week as it embarks on plans to salvage its stock exchange listing status. The how is important because a Nikola stock reverse split is on the cards.
The possibility of a Nikola stock reverse split was floated about two months ago (in April) when its chairman addressed shareholder questions regarding the company’s future. He noted that it would be part of the proposals that would be brought forth for shareholders to vote on in June. Shareholders voted on the proposals last week and Nicola revealed that the stock reverse split has been approved.
What Is a Reverse Split?
Before we get into the details of the Nicola reverse stock split, it is necessary to first understand the concept. Stocks splits usually involve splitting a share into multiple shares that have a lower value which in total is equivalent to the original.
Reverse stock splits are the opposite and they involve merging a determined number of share to form a single larger share whose value is the sum total. In simpler terms, imagine you have 3 shares each worth $2. If they are merged to form one share, the single share will be worth $6, hence a reverse stock split will have taken place at a 1:3 ratio.
Why is Nicola reverse stock split necessary?
The short answer is yes, but let’s dive into the gist of it to understand why it is necessary. The fuel cell truck manufacturer is at risk of stock exchange delisting. According to markets and listings requirements in the U.S, the minimum stock price required for NASDAQ listing is $5. However, once launched, a stock should maintain its value at or above $1. If it dips below $1 it risks being delisted.
Nicola’s stock price traded at $0.51 at the time of writing and has been struggling to stay above $1 for most of 2024 (so far). This means the stock might be delisted if the company does not do anything about it, and it explains the decision to conduct a reverse split.
Delisting would make it more difficult for the stock to secure public investment, hence making it harder for it to reach its development milestones. This may lead to a negative feedback loop, triggering more stock price losses as investors become discouraged. The downside for existing investors is that the value of their shares would continue to fall.
Advantages of a Nikola stock reverse split
There are multiple benefits to be had from a reverse split. Let’s take a look at some of the benefits to expect in Nikola’s case:
- A Nikola stock reverse split will allow the company to address potential delisting concerns.
- Stabilizing the price well above $1 could facilitate more share price consistency and this could boost marketability.
- Overcoming the delisting concerns could trigger renewed investor confidence.
Proposal 2 Details
Nikola shareholders voted on 5 proposals on 5 June. Proposal 2 was presented as the company’s recommendation for a stock split. The proposal highlighted a reverse stock split as one of the most viable option for preventing a delisting. The shareholders reportedly voted in favor of all the 5 proposals including the Nikola stock reverse split.
Also Read : Tesla stock split history: Everything you should know
Conclusion on Nikola Stock reverse split
The U.S stock market has been quite active lately with major companies such as Tesla and Nvidia going for stock splits. The Nikola stock reverse split is on the other end of the spectrum, underscoring the diversity of outcomes in the market.
It is no surprise that Nikola has been struggling especially with its EV truck pursuits and that has slowed down its progress. However, the company is still determined to make a mark especially on the hydrogen fuel cell trucks industry. The Nikola stock reverse split may offer the company a chance at securing its success and this could encourage more investor participation.
Also read about Nvidia stock split: Ready For Another Epic Rally?
