Investors wanted Nikola to be the next Tesla. It's not.

Wednesday, December 2, 2020

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How the next breakout star for electric vehicles veered off course.

Everyone wants to invest early in the next Tesla (TSLA), which has seen its stock skyrocket 559% this year. Tesla’s rise has been fueled by the electric vehicle company’s ability to turn a profit for five quarters in a row for the first time in its history, and its impending addition to the S&P 500.

The firm’s performance coupled with signs of improving EV interest in the U.S., China, and Europe has driven investors to search for the next breakout star in the sector, with many hoping it would be alternative-energy truck company Nikola (NKLA). They were wrong.

With a charismatic leader at the helm in 38-year-old Trevor Milton, Nikola went public via a SPAC (special purpose acquisition company) on June 4 at $37.55 a share. Its stock quickly shot up as high as $93.99 just five days later. General Motors, seeking to get a leg up in alternative-energy transportation, planned to take as much as a $2 billion stake in the firm.

But Nikola is no Tesla. Allegations of fraud spurred by a short-seller report has both the Securities and Exchange Commission and Justice Department looking into the firm. And on Monday the company rolled out a watered-down version of the GM deal that eliminates the $2 billion stake and kills Nikola’s electric Badger pickup. The very same one that Milton said would eventually take on Ford’s F-150.

In the end, the deal that was supposed to put Nikola on a path to greatness is, as Wedbush analyst Dan Ives put it, “nothing to write home about.”

Nikola’s Hindenburg problems

Out of the gate, Nikola looked like a promising firm developing hydrogen-powered tractor trailers for the transportation industry. But after Nikola went public, short seller Hindenburg dropped a bombshell of a report accusing the upstart company of massive fraud including faking its product demos. Milton and Nikola denied the claims, though Milton stepped down as CEO shortly after the report went public.

Hindenburg said a video appearing to show one of the company’s tractor trailers driving under its own power was in fact simply showing the vehicle coasting down a hill. It also said that a prior stage demonstration of a tractor trailer that was supposed to be operating on its own power actually showed the vehicle plugged into a power supply under the stage.

Then came the subpoenas. In a filing with the SEC, Nikola revealed that the commission subpoenaed the company and five of its officers on Sept. 14 over the allegations made in the Hindenburg report. The SEC subpoenaed another three officers and employees on Sept. 21. On Sept. 30, the company and its directors were also hit with subpoenas from the SEC.

Separately, on Sept. 19, Milton and the company received grand jury subpoenas from the U.S. Attorney’s Office for the Southern District of New York. Finally, on Sept. 21, the company received a subpoena from the New York County District Attorney’s Office.

Oh, and at least five putative class action lawsuits were filed against the company as well as current and former directors, alleging the firm and its employees lied in public statements about Nikola’s business plan and prospects.

The GM deal proves Nikola is no Tesla fighter

So what does the Nikola and GM deal mean? Originally, the companies were supposed to come together to bring GM’s hydrogen fuel cell and battery technologies to Nikola’s tractor trailers and see GM build Nikola’s planned Badger electric and hybrid pickup truck. The automaker was also supposed to take an 11%, or roughly $2 billion, stake in Nikola.

That’s out the window now. The terms of the new agreement, which is actually a non-binding memorandum of understanding, say that GM will supply Nikola with its fuel cell technology, but will not take that $2 billion stake in the firm.

The Badger is also a no-go for GM, which means the pickup that Milton told Yahoo Finance he hoped would take the crown from Ford’s F-150 will never be built. Instead, Nikola will provide refunds to all customers who put down cash for the vehicles.

The move is a major repudiation of the vision for Nikola under Milton, and puts the firm on track to focus on its tractor trailer business.

All of that comes from a company that hasn’t actually sold any completed vehicles.

Investors hungry to get in on a Tesla-like stock early enough for them to reap the rewards if it turns into an automotive juggernaut saw Nikola as the perfect opportunity. Its founder and CEO was an enthusiastic salesman in the vein of Tesla’s Elon Musk, its vehicles were set to take on the biggest automakers in the world, and it was looking to upend the trucking industry.

But not every company will be a Tesla. Even Tesla, which with a market cap of more than $550 billion is now worth more than any other automaker on the planet, faced a series of setbacks including overpromising on delivery targets and dealing with production issues.

And let’s not forget Tesla’s own SEC drama. Musk was charged with securities fraud in 2018 for tweeting to his 22 million followers that he had funding to take Tesla private at $420 a share. As part of a settlement with the SEC, Musk agreed to step down as chairman of the board, and he and the company paid $40 million in penalties.

It’s no small feat that Tesla is where it is now.

And it’s possible Nikola could overcome its own setbacks — if it focuses on its trucking initiatives. The revised deal with GM is a “positive outcome” for Nikola in the medium- and long-term since it can focus on its core Class 8 truck and avoid the distraction of the Badger pickup, JPMorgan analyst Paul Coster wrote in a research note following the GM announcement.

While Ives also acknowledged Nikola has solid ideas for the trucking market, he says the GM deal will be a hard pill for investors to swallow.

“There is only one Tesla and Musk but there will be many successful players in the EV market for the next decade and Nikola is hoping to be one of those vendors,” Ives said. “For now they have some Herculean-like challenges ahead.”

By Daniel Howley, tech editor. Follow him at @DanielHowley

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