Nikola GM Partnership and the effect of Hindenburg report

Nikola and General Motors announced a strategic partnership. Nikola stock jumped 40% on the news and GM stock rose by 8%. The excitement was that Nikola was getting a heavyweight partner to execute on it’s Nikola Badger electric vehicle and GM was getting an equity stake in the electric vehicle company that is touted as the next Tesla. 

General Motors share of the deal

1. General Motors to receive $2 billion equity stake in Nikola in exchange for certain in-kind contributions
2. General Motors expects to receive in excess of $4 billion of benefits between the equity value of the shares, contract manufacturing of the Badger, supply contracts for batteries and fuel cells, and EV credits retained over the life of the contract
3. General Motors to be exclusive supplier of fuel cells globally (outside of Europe) to Nikola for Class 7/8 trucks, providing validation and scale in a multi-billion dollar total addressable market
4. Badger is anticipated to enter production by year-end 2022

Nikola’s share of the deal

1. General Motors to engineer, validate, homologate and build the Nikola Badger for both the battery electric vehicle and fuel cell electric vehicle variants as part of the in-kind services.
2. Nikola anticipates saving over $4 billion in battery and powertrain costs over 10 years and over $1 billion in engineering and validation costs
3. Nikola immediately gets decades of supplier and manufacturing knowledge, validated and tested production-ready EV propulsion, world-class engineering and investor confidence.

Enter Hindenburg research

Founded by Nate Anderson, CFA, CAIA, Hindenburg Research specializes in forensic financial research. They specifically look for companies with accounting irregularities, bad actors in management, and illegal or unethical business practices. The following are the recent 2 big wins they had in their short positions:

1. In April 2020, Hindenburg wrote about SC Worx (NASDAQ:WORX), stating that the company’s announced COVID-19 testing deal looked to be “completely bogus”. They also raised questions on the credibility and character of the CEO. SC Worx was halted by the SEC in late April and has not resumed trading.
2. In March 2020, Hindenburg wrote a second report on Predictive Technology Group (OTC:PRED), calling into question the company’s COVID-19 related press releases. The company was halted by the SEC in late April 2020 for “claims about COVID-19 tests” and now trades on the Grey Sheets. The company’s market value dropped 90% from a peak of $1 billion.

Hindenburg research has now taken a short position on the Nikola stock and published an extensive article blasting Nikola’s vehicles and the credibility of the CEO Trevor Hamilton. The article is titled “How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America”

The following are some of the main issues raised by Hindenburg regarding Nikola:

1. Recorded phone calls, text messages, private emails and behind-the-scenes photographs allegedly detail dozens of false statements by Nikola founder Trevor Milton.
2. A video that surfaced “Nikola in Motion” that shows a semi truck cruising at a high rate of speed. Hindenburg alleges that the truck was towed to the top of a hill and was simply rolling down the hill while being filmed.
3. The battery technology that was being claimed by Nikola never existed and they are now simply using the Altium GM battery for their Badger production.
4. Trevor has appointed his Travis to a Director position in the critical part of the business. Travis has no prior experience in this kind of position.
5. Nikola does not have any technological expertise and just keeps buying vendors for key technologies. Each acquisition leads to more investors flocking in turn increasing the cash position of the company.
6. The key investors and Trevor have been cashing in on their equity in the hot bull market. Mr. Milton has laid the groundwork to extract hundreds of millions from Nikola years before delivering on his promises.

Nikola’s response to Hindenburg

1. The semi truck video is the central theme of the Hindenburg report. Nikola claims that the private investors for whom the video was made fully knew the truck was not functional. In response they posted some of their later videos that show operational Nikola One trucks. https://bit.ly/3iAfubi
2. Short Seller Alleges that the 2016 Nikola One “was not a real truck and was, in fact, a pusher”: The Nikola One is a real truck that sits in Nikola’s showroom. A pusher means a vehicle that was not designed to be moved by its own propulsion system. The Nikola One was, in fact, designed to be powered and driven by its own propulsion. https://bit.ly/3hnqRSo
3. Nikola reported the matter to the SEC to take action against Hindenburg.

Nikola defended by Wedbush analyst with ‘massive opportunity’ in the balance

1. “If Trevor and the team can successfully build out its Arizona factory, morph prototypes into models (both on Badger and trucking front), lay the groundwork for its charging network, and catalyze delivery trucking orders with an attractive gross margin structure then the opportunity for NKLA is massive and the stock will reflect this dynamic,” he adds.
2. Wedbush keeps a Neutral rating on Nikola as it waits for the “prove me” story to play out.
3. Wedbush assigns a price target of $45 on Nikola to rep more than 50% upside from its current level.

Conclusion

Credibility is important for any management team, but this is especially true of a company like Nikola that has virtually no revenue and no shippable product. Given Nikola’s market cap as of this writing, the company is a $20 billion promise of what it can achieve in the future.

Nikola is often touted as the next Tesla. Unlike Nikola, Tesla develops extensive proprietary technology, which cuts many traditional automakers and suppliers out of its picture. Tesla has now delivered five different EVs. the Models S, X, 3, and Y are still in production with the Model 3, the current efficiency leader of production cars. Tesla also has two operational class 8 semis that have been in use to refine and guide final development. Nikola gets its value from the strategic partnerships it has with other OEM suppliers and acquiring technology from other vendors. There is no in house intellectual property that is being developed to show for. 

Trevor is compared with Elon Musk. Musk is a serial entrepreneur with successful ventures like PayPal, SpaceX, and SolarCity. He is a charismatic figure who focuses on delivering shareholder value and fulfilling his promises. Trevor has nothing much to show from his past experience in that respect.

Nikola investors have to be aware of all these intricacies and then make a judgement whether investing in the stock is good for their financial future.