Amid the insane race that is the electric vehicle market, Nikola (NASDAQ:NKLA) has always been a “dumb money” venture. Simply on the basis of competing – cheekily, I might add – against Tesla (NASDAQ:TSLA), the upstart was always going to have its detractors. However, a damning report by notorious short-seller Hindenburg Research blunted momentum in Nikola stock.
In the extensive report, Hindenburg accused Nikola founder and executive chairman Trevor Milton with concocting an intricate fraud. One of the most damaging accusations was that management knew its Nikola One electric semi-truck wasn’t functional, yet Milton marketed the innovation as a working prototype.
Combined with what Hindenburg perceived as a weak response from Nikola, the short seller is even more convinced about Milton committing securities fraud.
Obviously, this isn’t a great look for Nikola stock, which has courted all kinds of accusations regarding deceptive business practices. But what’s curious, though, is that the underlying company was allegedly able to deceive automotive giants like General Motors (NYSE:GM).
A few days before Hindenburg’s devastating report, GM took a $2 billion stake in Nikola. Specifically, the deal allows NKLA “to exchange $2 billion in newly issued stock for services and access to GM’s parts and components.” In a statement, GM will “engineer, homologate, validate and manufacture the Nikola Badger battery electric and fuel cell versions.”
While this is a credibility boost for Nikola stock, auto experts pointed out that this deal is almost completely one-sided in favor of GM. Basically, the agreement is initially cashless. Should Nikola go down with criminal charges, it will only look bad from an optics perspective.
Though an understandable argument, bad optics is exactly what General Motors doesn’t need.
GM Deal Is Still a Catalyst for Nikola Stock
It wasn’t that long ago that GM drew the ire of the American public. To quickly recap, a defect in the ignition switch caused GM cars with the structural vulnerability to accidentally shut down. With the engine turned off, the airbag deployment system was essentially useless, leading to severe injuries and fatalities.
Sadly, the latter was the case for Brooke Melton. According to AtlantaMagazine.com, Melton’s car was a key piece of evidence that her parents used in a lawsuit against GM. For the once-proud American icon, it was a deeply scandalous event that left a scar on the organization.
Definitely, I understand the argument that on paper, General Motors is the biggest winner with its NKLA deal. Basically, Nikola will pay GM to build its EVs. If Nikola stock goes to zero, for instance, it’s not a waste for the automotive giant. Instead, the company would have gleaned valuable research and development in a new-to-them platform.
And while NKLA is solvent, the upstart will pay GM to do what it would have done anyways: build EVs to start seriously competing against Tesla. Therefore, from this perspective, it’s all win and no lose for GM. That might explain why GM executives failed to perform due diligence on Trevor Milton and his Nikola unicorn. Also, GM rival Ford (NYSE:F) has aggressively jumped into the EV space, necessitating a response.
Frankly, I can’t say for certain one way or the other. But the problem with this argument is that it assumes GM doesn’t care about its reputation. In my opinion, the company has every incentive to due diligence the living snot out of Nikola.
After a horrible scandal, the last thing GM needs is another one, especially because its rivals are upping their EV game.
Still Risky, Still Worth a Measured Shot
Despite the awful accusations against Nikola stock and the underlying business (many will argue a lack thereof), I believe NKLA is still worth a shot with dumb money. While I am concerned about the nearer-term impact, contrarians can take some confidence in two fundamental factors.
One, EVs inherently do away with much of the mechanical complexities of combustion-engine cars. Mainly, a traditional “analog” car has about 30,000 components. On the other hand, an EV needs just 11,000 parts. This sidestepping of automotive mechanics has allowed companies like Nio (NYSE:NIO) to flourish.
Two, the EV market, once fully fleshed out, will be more than big enough to accommodate multiple competitors. Of course, a key distinguisher in this arena is automotive design. In my opinion, Nikola’s flagship Badger has the right mix of familiarity and futuristic elements. And if it accelerates according to its marketed specifications, it should convert many gearheads.
Again, none of this is to suggest that Nikola stock is a blue-chip investment. But as part of a speculation portfolio, I think NKLA has the potential to positively surprise.
On the date of publication, Josh Enomoto held a long position in NKLA and F.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.