It’s been a crazy couple of weeks for Nikola (NASDAQ:NKLA) and General Motors (NYSE:GM) investors. NKLA stock has tanked following short seller fraud allegations. But as a GM stock investor, I couldn’t be happier about the company’s new deal with Nikola.
Nikola may turn out to be a total fraud, although that seems unlikely. Either way, GM structured its Nikola deal so that it has tremendous potential long-term upside and virtually no downside. Even if Nikola goes up in smoke, GM stock investors lose nothing. And perhaps more importantly, GM may have found a winning recipe for competing in the next-generation auto market.
GM Stock Insulated From Nikola
It’s very rare that a $2 billion deal involves virtually no risk for one of the parties. However, earlier this month, GM agreed to take an 11% ownership stake in Nikola in exchange for…nothing.
Well, GM stock investors are hoping that nothing turns out to be something. GM’s end of the deal is that Nikola will pay $700 million to GM to expand its manufacturing capacity and eventually produce Nikola’s Badger pickup truck. Nikola will then make additional payments to GM to produce the trucks. Nikola will use GM’s Ultium battery platform for its battery-electric Badger and GM’s Hydrotec fuel cell technology for its hydrogen-propelled Badger.
In other words, Nikola is more like a customer for GM than a partner. And the 11% ownership stake in Nikola is essentially a non-refundable down payment.
“For GM, there’s really no downside to the deal,” Guidehouse analyst Sam Abuelsamid said of the deal. “It’s all upside.”
Bank of America analyst John Murphy takes it a step further. He says the Nikola deal shows just how highly Nikola and its charismatic co-founder Trevor Milton think of GM’s next-gen technology.
“NKLA will leverage GM’s Ultium battery technology for electric vehicles and Hydrotec technology for fuel cell vehicles, which we believe endorses GM’s position as an industry leader for powertrain technology across the full spectrum propulsion systems,” Murphy says.
Is Nikola A Fraud?
The same week GM and Nikola announced their new deal, short seller Hindenburg Research released a hard-hitting report accusing Nikola and Milton of orchestrating an “intricate fraud.” Among the accusations, Hindenburg claims Nikola deceived investors in a 2017 video that appeared to show a self-propelled semi-truck. Instead, it seems the truck was simply rolling down a slight hill and propelled by gravity. Hindenburg also said Nikola’s claims that all of its components are manufactured in-house is false. In its rebuttal, Nikola admitted it uses third-party components in its prototypes. he company claims it is designing its own in-house parts to use in the actual products.
On the surface, it seems to me that many, if not most, of Hindenburg’s allegations are likely true. However, it’s not crystal clear to me that they constitute fraud. In fact, it’s not clear to me that they are nefarious at all.
Milton and Nikola seem to be taking a page out of Tesla (NASDAQ:TSLA) and CEO Elon Musk’s playbook. Milton is adopting that famous Silicon Valley “fake it until you make it” philosophy. Musk has long made promises, projections and demonstrations of products to hype up an idea that is not fully functional or aspirational in nature. Just look at his recent Neuralink demonstration. Implanting electrodes in a live animal and then recording their neural firing patterns is far from cutting-edge technology. I performed a very similar experiment in rats in an undergraduate brain lab back in 2006.
In fact, unlike Milton, Musk has actually paid a fraud settlement to the Securities and Exchange Commission related to his infamous “funding secured” tweet back in 2018.
I’d be willing to bet Milton, like Musk, is simply an idealist. They are both willing to make high stake bets that they can market ideas rather than products. If they can then come back and turn those ideas into reality, all’s well that ends well.
A Winning Blueprint
The SEC is reportedly now investigating Nikola. At some point, I’m guessing Nikola will be exonerated or it will be fined. GM CEO Mary Barra says Nikola was thoroughly vetted. I’d be extremely surprised to learn that the entire company is a sham.
The good news for GM stock investors is that it really doesn’t matter. If Nikola is a fraud, GM got free shares of a worthless stock. If it’s not, GM stock investors have both an 11% stake in a potential transformative EV company and a new customer.
But the more valuable lesson from the Nikola deal could be its structure. There are dozens of EV startups out there working on developing competitive technology. None of them have the production power GM does. I wouldn’t be surprised to see GM strike similar deals with other EV startups in the future.
GM’s biggest problem in recent years is its reputation as an auto “dinosaur.” Deals with Trevor Milton, Nikola and other exciting EV startups can help it change that public perception. In the meantime, GM will continue to develop its own EV models and autonomous driving technology under the radar. That approach is a winning recipe for long-term GM stock investors.
On the date of publication, Wayne Duggan held a long position in GM.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market.