A Major Embarrassment Drastically Hurts the Case for Nikola Stock

Nikola (NASDAQ:NKLA) executive, chairman and founder Trevor Milton, resigned his position Sep. 20 on fraud allegations by a short seller. Nikola stock dropped by 27% on the news.

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

Media pundits of all stripes have weighed in on the subject with opinions all over the map. All of them entirely understandable. This is a cluster fudge of epic proportions.

Nikola Stock Got Pumped Up by the News

From my perspective, I’m irked about the turn of events. Only days earlier, Nikola was strutting around like a peacock in heat, celebrating the big-time strategic partnership it had just signed with General Motors (NYSE:GM).

“Nikola is one of the most innovative companies in the world. General Motors is one of the top engineering and manufacturing companies in the world. You couldn’t dream of a better partnership than this,” said Nikola Founder and Executive Chairman Trevor Milton.

“General Motors has a vested interest to see Nikola succeed. We made three promises to our stakeholders and have now fulfilled two out of three promises ahead of schedule. What an exciting announcement.”

I guess the third promise to stakeholders was to thoroughly embarrass its strategic partnership less than two weeks after signing the agreement.

As for GM chief executive officer Mary Barra, she was quite proud of her company’s state-of-the-art technology, including its Ultium battery and Hydrotec fuel cell systems.

“We are growing our presence in multiple high-volume EV segments while building scale to lower battery and fuel cell costs and increase profitability. Also, applying General Motors’ electrified technology solutions to the heavy-duty class of commercial vehicles is another important step in fulfilling our vision of a zero-emissions future,” Barra stated in the joint press release Sep. 8.

Why am I Irked About the Turn of Events?

Toward the end of August, I was anything but enthusiastic about Nikola stock.

“If you’re going to pay an arm and a leg for an electric vehicle stock, I would recommend Tesla over Nikola every day and twice on Sundays,” I wrote Aug. 26.

“With so many options available, and so little revenue on its books, Nikola stock should only be an option for aggressive investors. Everyone else should wait for the picture to get a little clearer before hopping on the bandwagon.”

There was no question in my mind that Nikola was a risky stock. I was convinced that Nikola wouldn’t go much higher without greater clarification on future revenues, etc. I was seriously concerned about its transparency around vehicle reservations.

Most definitely, NKLA was not a good buy for your 401k.

And then GM announced its strategic partnership with Nikola, instantly rubber-stamping the electric vehicle startup.

A week after the grand announcement, I included Nikola in a gallery of 20 stocks to buy if Joe Biden wins in 2020. After all, it was a clean energy winner.

“Biden will love two American companies coming together to deliver cleaner energy,” I wrote Sep. 15.

“Moreover, on Aug. 26, I suggested that investors ‘should wait for the picture to get a little clearer before hopping on the bandwagon.’”

“However, you can’t get much clearer than GM. And thus. NKLA stock is a buy on this news.”

Until it wasn’t.

What Was GM Thinking?

Hindenburg Research released a report Sep. 10 that accused Nikola of being “an intricate fraud built on dozens of lies over the course of its founder and executive chairman Trevor Milton’s career.”

These accusations came just two days after the strategic partnership announcement that had Milton and the rest of the management team strutting like peacocks.

Mary Barra said to analysts Sep. 14 that she had “a very capable team” doing due diligence on Nikola before entering a $2 billion partnership with the company.

The website GM Authority reports that the go-between on the deal was Steve Girsky, a former GM executive who worked at the company for seven years, retiring from its board in 2016.

“We showed up with an army of people to [do] due diligence [on] this thing,” Girsky said early last month. “I don’t doubt there are going to be twists and turns here, but I did put my reputation on the line for this deal.”

According to his bio, Girsky has served as a director of Brookfield Business Partners (NYSE:BBU) since 2016. He’s also a managing partner of VectorIQ, a New York City-based independent advisory firm. He was a vice-chairman of GM from 2009 until 2014. With more than 30 years of automotive experience, Girsky either got taken by Milton, or the Hindenburg claims are nothing more than falsehoods and innuendo.

At this point, I couldn’t tell you what’s going to happen with the strategic partnership.

However, as bad as Milton’s resignation appears to investors, I don’t think he had any choice. To save the partnership and his investment, he needed to detach from the situation so lawyers could figure out if there’s any substance to Hindenburg’s claims.

If Milton knows he’s innocent, the truth will come out faster if he’s not getting in the way of a proper investigation. If you own Nikola stock, all you can do at this point is wait for the air to clear and for GM to decide whether it still wants to proceed with the strategic partnership.

The one thing I do know is that Mary Barra’s reputation rests on how this turns out. For her sake, and that of GM shareholders, it better be good news. For Nikola, anything less than an outright vindication could mean lights out for its electric vehicle dreams.

We ought to know soon enough.

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/gaffe-may-mean-nikola-stock-is-not-a-buy/.

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