On Tuesday Sept. 8, Nikola (NASDAQ:NKLA) rupted 40.8%. That price action came on a day where the Nasdaq fell more than 4%, which helped erode part of the 53% rally investors saw in Nikola stock at one point.
Sparking the rally was an allegiance with General Motors (NYSE:GM).
GM acquired an 11% stake in the startup automaker. Despite Nikola not yet producing any vehicles (and only recently breaking ground on its production facility in Arizona), General Motors felt it was a worthy investment.
A Closer Look at Nikola Stock
This type of stuff is going to drive fundamental investors crazy. As if seeing Tesla (NASDAQ:TSLA) drive up to a $450 billion market capitalization isn’t enough, Nikola now commands a market cap of roughly $19 billion.
For comparison purposes, that’s larger than Fiat Chrysler (NYSE:FCAU) and its $17.5 billion market cap. It’s also despite Fiat having impressive and profitable brands like Jeep and Ram Truck, among several other lines.
In any regard, GM has acquired an 11% stake in the company, which is comprised of 47.7 million shares at $41.93. The automaker’s stake also has staged lock-up provisions ranging from one year to June 2025. For illustrative purposes, at $50 per share, GM is up about $385 million on its stake.
So what does Nikola get back for giving up a stake in its business? “General Motors will engineer, homologate, validate and manufacture the Nikola Badger battery electric and fuel cell versions.”
Nikola will also have the “in-kind services and access to General Motors’ global safety-tested and validated parts and components” and “will utilize General Motors’ Ultium battery system and Hydrotec fuel cell technology.”
Breaking Down the Nikola GM Deal
So what does this all mean? For GM, which rallied 8% on Sept. 8, the company now has a vested interest in Nikola. Nikola is taking a slightly different approach to the electric vehicle game than Tesla. While Tesla’s bets from several years ago are paying off today, there’s no guarantee that similar bets made today will work out for Nikola.
Therefore, partnering with an excellent manufacturer can help accelerate Nikola’s path forward. As its founder and CEO Trevor Milton said, “Nikola immediately gets decades of supplier and manufacturing knowledge, validated and tested production-ready EV propulsion, world-class engineering and investor confidence.”
What does GM get? Well, it now has the potential to ride the wave in Nikola stock. If the automaker does well, it too will reap the rewards. Imagine buying into Tesla at a sub-$20 billion valuation and seeing it grow 25-fold in just a few years.
I’m not saying that will happen with Nikola, but clearly GM did not want to miss out on the next big possibility. And with Nikola’s line-up, maybe it will be.
While Tesla’s Cybertruck has been met with plenty of fanfare, Nikola’s all-electric pickup — the Badger — is a more traditional take on the vehicle. Surely that will win over some fans. Now that GM has a stake in the company, it should provide credibility to Nikola as well, while also reducing costs for the aspiring automaker.
Wedbush analyst Dan Ives has a similar take.
“This news is a huge shot in the arm for Nikola and cements credibility not just for its Badger production slated to begin by the end of 2022 but for its hydrogen fuel cell ambitions and semi truck vision going forward,” he wrote.
Trading Nikola Stock
This deal is a great development for Nikola in my mind and gives GM some potential upside.
However, as I’ve already stated, the market is valuing Nikola as a ~$20 billion entity. This is a company with no revenue that’s hoping to begin production of its Badger pickup in late 2022.
That said, Nikola now has a partnership with GM that it traded for stock, while boasting cash of almost $700 million. That’s against current liabilities of just $30 million. In other words, while the valuation is still rich, there is no real concern about liquidity.
What do the charts say?
First, let’s just say “wow” for that volume on Tuesday. That’s a positive for bulls, but they will need to keep the stock up to maintain control. After Nikola stock ran north of $50, shares were rejected by the 38.2% retracement.
On Wednesday — despite a healthy rebound in the broader market — the stock fell almost 10%. In doing so, shares fell back below the August high at $47.45. If Nikola stock can reclaim this mark, look for a push back up toward $50. Above it and shares can retest the 38.2% retracement. Above $55 puts the 50% retracement in play at $61.50.
On the downside, look for a continued decline into the 20-day and 50-day moving averages. Below these marks puts the backside of prior downtrend resistance in play at near $37.50.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
