Nikola (NASDAQ:NKLA) stock shareholders have been on a wild ride this week. On Tuesday, General Motors (NYSE:GM) announced a $2 billion equity investment in the electric truck maker, sending the stock shooting up 40%. Shares then slid 12% on Wednesday when short-seller Hindenburg Research accused the company of being “an ocean of lies.” And on Friday, NKLA stock is down another 16%.
According to its research, founder Trevor Milton had been deceiving investors for years — at one point rolling a truck down a hill to get footage as if it were driving on a flat road. So what should investors do? Well, I’ll let you in on a little secret about the electric vehicle (EV) industry: It’s always been built on a series of lies.
Most startups are, and EVs are a particularly audacious case because of their intense capital requirements. While software companies might have to raise millions of dollars to create a marketable product, electric vehicle companies often have to raise billions. And that usually means bending the truth to get investor money.
So if you’re comfortable investing with hucksters, Nikola provides the best path to finding the next Tesla (NASDAQ:TSLA). Founder Trevor Milton will now take a backseat after GM’s massive investment. But if the thought of enriching a self-serving founder makes your skin crawl, then there are other ways to make money. So how mercenary are you?
Nikola Stock: A Startup’s Sins
Readers will know that I like the electric vehicle industry. Its potential is so compelling that oil market strategists have adjusted their expectations for decades out.
However, most startups also need to fool investors just long enough to raise capital. Few might remember the charisma that Jeff Bezos showered on investors to get Amazon (NASDAQ:AMZN) off the ground. But he managed to list the company in 1997 just in time. Only two years later, in 1999, The Wall Street Journal ran “Amazon.bomb” across the front of its Barron’s magazine. “Unfortunately for Bezos, Amazon is now entering a stage in which investors will be less willing to rely on his charisma and more demanding of answers” The Wall Street Journal wrote.
Elon Musk worked the same issue at Tesla. “He’s done amazing things, but at the same time, he’s not a straight-shooter,” said Darryl Siry, Tesla’s former senior vice president for sales and marketing. “It’s a reality distortion field and it’s a powerful one. He gives the facts to fit the narrative he wants out there.”
From Startup to Grown Up
Today, Nikola finds itself in a similar situation. The company has repeatedly claimed to have “battery-electric and hydrogen fuel-cell electric” technologies, a rather important component to any electric vehicle.
But did the company actually have the technology? Probably not.
In Tuesday’s agreement with GM, Nikola revealed it would rely on GM’s Ultium batttery system and Hydrotec fuel cell technology. These are fuel technologies that GM had developed for its 20 new EV models to release by 2023. So whether or not Nikola had the fuel technology becomes irrelevant.
So why would GM agree to the deal? That’s because GM will receive a much-needed marketing boost for its EV efforts. The legacy automaker already has the #2 position in electric vehicles after Tesla thanks to its understated Chevy Bolt. But marketing has always been an issue: the company sells just 5,000 Bolts a quarter.
It’s not often that a partnership benefits both sides. But here’s a time it does.
The GM deal also gives Nikola a much-needed first-mover advantage in hydrogen fuel cells. And that could make Nikola the next Tesla. Whoever wins the hydrogen fuel cell wars will reap enormous benefits: more refueling stations means more vehicle sales, which leads to even more fuel cell stations. It’s a virtuous cycle.
“This news is a huge shot in the arm for Nikola and cements credibility not just for its Badger production … but for its hydrogen fuel cell ambitions and semi truck vision going forward,” Wedbush analyst Dan Ives said. “There have been many skeptics around Nikola and its founder Trevor Milton’s ambitions over the coming years, which now get thrown out the window with stalwart GM making a major strategic bet.”
What’s Nikola Stock Worth?
Here’s the tricky part. Nikola now has a $19 billion market cap with basically zero revenues. Even Tesla was selling 22,000 cars by the time it reached that valuation.
But using some reasonable estimates starts to paint a better picture of what’s at stake with Nikola stock valuation.
To reach its current $50 value, Nikola would have to grow revenues to $24 billion by 2029, about the same growth rate as Tesla managed between 2010 and 2019. Tesla, however, built its own factories, which hampered its ability to grow. Nikola, on the other hand, will have GM’s manufacturing heft at its disposal. If Nikola can instead grow to $30 billion revenues with an 18.3% EBITDA margin by 2029, its fair value jumps to $72, or a 43% upside.
Can You Stand the Dishonesty?
Good riddance, I say.
Even startup founders need to draw the line on how far they’re willing to deceive investors. But that’s in the past. Now that Nikola is in far more trustworthy hands, it’s time for GM and CEO Mark Russell to make the most of Nikola’s “ocean of lies” and produce some gorgeous-looking trucks. Investors could yet win big
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.