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Don’t Chase the Dip in Nikola Stock Because Things Could Get Worse

What started out as a spectacular week for Nikola (NASDAQ:NKLA) quickly fizzled out as the company came under scrutiny for fraud allegations, Nikola  stock responded accordingly.

Nikola Stock: Image on phone screen
Source: Stephanie L Sanchez / Shutterstock.com

The accusations only served to undermine the up-and-coming zero-energy vehicle company that was compounded by a range of issues over the past few years. Nikola stock now remains one of the most volatile investments on the market.

Sandwiched between good and bad news in just a span of a few short days, Nikola is struggling to pick up the pieces of its broken reputation.

While the company’s clean-energy technology does show a lot of promise, the controversy surrounding Nikola has many investors staying away from this investment.

Nikola Stock Soars After GM Deal

Ever since going public in June via a reverse merger, Nikola, the electric van manufacturer, has been creating a name for itself in the auto world. Electric vehicles (EV) have been all the rage in this industry since the dawn of Tesla (NASDAQ:TSLA) and greater environmental regulations across the globe have made the need for this type of technology greater than ever.

However, the success of EVs also has also left many traditional auto giants in the dust despite having the production capabilities to match their EV counterparts. Many such companies are looking to jump in on the trend as the Covid pandemic brought sales in the industry to a halt.

In a surprising turn of events, Detroit auto giant, General Motors (NYSE:GM) announced a $2 billion investment in Nikola. As part of the deal, GM will assist the company with the development and production of its upcoming models in exchange for an 11% stake in the company.

The agreement is part of GM’s ongoing effort to provide external companies with the parts required for the production of EVs which can increase revenue and drive down costs.

Following the announcement, Nikola stock surged 41% while GM stock increased by 8%. The partnership between the two companies is one of many between traditional auto giants and their younger rivals. Last year, Ford Motors (NYSE:F) partnered with Rivian to outsource components for manufacturing.\

The deal between GM and Nikola was a win-win for both companies in terms of valuation and revenue. However, the elation was short-lived as Nikola was soon hit with fraud allegations that put the company’s credibility into question.

Nikola Gets Shaky After Controversy

Just two days following its deal with GM for $2 billion, Hindenburg Research published a scathing report on Nikola calling the company an “intricate fraud.”

As detailed in the findings, Hindenburg accused Nikola’s founder, Trevor Milton, of making deceitful comments about the progression of its hydrogen-powered trucks and the culture of nepotism in the company.

The accusations weighed so heavily on the Nikola stock price that it fell by 8%. Although Milton denied the claims made in the report, he did not provide any clear rebuttal. In a statement, he stated working with outside counsel to address the report and would release a detailed response the following week.

However, Milton and Nikola continued to take hits. Hindenburg’s founder, Nathan Anderson said that the company was “unable to answer any one of the 53 questions raised in our report” that exposed its deceptive practices. Following this, Citron Research congratulated the forensics company on revealing Nikola as a “total fraud” and even offered to cover half of the company’s legal expenses.

The support from Citron only added to the validity of the claims and Nikola stock fell a further 14%. The company that was once labeled “the most innovative company in the world” now finds itself in a sea of controversy with its reputation on the line.

So What’s Next for Nikola?

Critics will say that Nikola stock is grossly overvalued at a market capitalization of $13.5 billion while supporters believe that the company’s novel technology will break barriers in the EV industry.

Nevertheless, the fraud allegations have put a lot of pressure on the Nikola stock and will continue to haunt the company in the coming months.

Nikola was once a shining star in the auto industry and briefly surpassed GM’s valuation during its high in June. But if there is truth to Hindenburg’s accusations of the company in overstating the viability of the technology, Nikola will find it a challenge to stay afloat in the highly competitive EV market.

Investors should stay away from this stock as the allegations continue to swirl.

On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.

Article printed from InvestorPlace Media, https://investorplace.com/2020/09/dont-chase-the-dip-in-nikola-stock-get-worse/.

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