The Not So “Big Short” of Nikola

Nikola Corp., the rising green vehicle company lauded as “the next big thing” in the automotive industry, has been monopolizing headlines lately for all the wrong reasons. After a report was published by Hindenburg Research  accusing the company of lying about its products and deals, the Securities and Exchange Commission (SEC) launched a probe to investigate Nikola for potential fraudulent representations of “its business prospects” to investors. This led the company founder and executive chairman Trevor Milton to step down from his role and BP to rescind their deal regarding the construction of hydrogen refueling stations. This sequence of events drove Nikola shares down 45%.

But what gave rise to suspicions about the company’s intentions and practices in the first place was the sale of 7 million shares by Milton right after the IPO at a price of $10 per share. This indicated to investors that the founder and chairman deemed the stock price inherently overvalued. Early short sellers supported this notion noting that the innovations and technology that would support the market’s predictions of the firm’s inherent value and stock price were neither secured by patents nor supported by research papers. However, the fraud allegations came after Nikola published a promotional video showing one of their hydrogen trucks moving “under its own propulsion,” which the short-sellers claimed to be a truck rolling downhill. Nikola later admitted the truck was not in motion on its own propulsion, but rather rolling downhill.

Despite the allegations by Hindenburg Research, Nikola’s strategic partner General Motors (GM) reported that they are not backing out of the deal. GM CEO Mary Barra informed the public that it was a “partnership made in heaven” as GM would receive $2 billion worth of stock (11% of Nikola)in exchange for Nikola using GM’s battery and fuel cell technology as well as producing Nikola’s first product, the Badger pickup truck. After Milton’s resignation analysts suggested that GM could increase their stake in Nikola in order to mitigate Nikola’s stock price drop. This news led to a 15% increase in Nikola’s stock while also increasing GM’s stock by 2%.

Analysts also predict that Nikola is here to stay. JP Morgan analysts have rated the company as a strong “buy,” predicting that  shares will reach $41 within one year. This rating comes even after some analysts have pointed out that Nikola’s inherent value is zero as the company lacks product and revenue and the share price has tumbled more than 52% since drawdown. However, JP Morgan’s rating has been backed by other industry heavyweights such as Deutsche Bank and Cowen, supporting that Nikola is a “story” stock for future gains. Pointedly, JP Morgan analysts predicted that by 2027 Nikola has an earning potential of approximately $1.6B EBITDA, with subsequent upside on the company’s stock.

One question remains to be answered. How did a company with zero revenue become public and manage to reach a $34B market cap? Nikola did not have the listing requirements for a traditional IPO. To overcome this, Nikola went public through a special purpose acquisition company (SPAC), effectively having the requirements for listing waived. This fact, combined with the market frenzy for environmentally friendly automotive stories, led a company with zero revenue and no product to reach a market cap of $34B. The market might be heading in the right direction by supporting these stock market stories, but it should not forget where similar stories led during the rise of the internet in 1999.