Nikola (NASDAQ:NKLA) has been one of the most buzz-worthy stocks of 2020. At one point Nikola stock was up over 670% on the year. But right now the more important question for investors is how low will the stock go?
By the time you read this article, you’ll likely be aware of the damning short report from Hindenburg Research. Effectively it says that outgoing chief executive officer Trevor Milton defrauded investors with specious claims. One of the most troublesome claims the report makes is that Milton marketed the company’s Nikola One electric semi-truck as a working prototype, but it’s not functional.
Oh and, the Hindenburg report is saying that the company is cooking its order book.
As bad as this may seem (and it could be very bad), right now it can give investors a chance to take a step back. And when they do, they may realize that Nikola is asking them to buy much more than an electric or fuel cell truck.
Haven’t We Been Here Before?
In a note following Milton’s resignation Cowen analyst, Jeffrey Osborne maintained his Buy rating for the stock. In doing so, Osborne described Milton as follows:
The founder and Executive Chairman Trevor Milton is a self-confident, boastful, and always-in-sales-mode type of individual; however, in our view [he] recognizes his weak points, and surrounds himself by high-quality partners to accelerate the time to market.
However, similar things been said of Tesla (NASDAQ:TSLA) founder Elon Musk? In fact, there are entire Twitter (NYSE:TWTR) accounts set up to debunk Tesla. But that hasn’t stopped Tesla’s share price from going higher. Why? As a colleague once told me several years ago, “Chris, Tesla is not an EV company, it’s a technology company.”
I’m still not sure I completely agree with that. However, right now, I want to use this example to bring the discussion back to Nikola. In comments regarding Milton’s resignation, Barron’s quoted RBC analyst Joseph Spak, who remarked that, unlike Tesla, Nikola is not a fully integrated manufacturer. According to Spak, Nikola is attempting to sell a truck and fuel as a bundle. With this in mind, most of Nikola’s value will come from the network of hydrogen fueling stations it’s in the process of building.
My overall point is that whatever you believe Tesla and Nikola are they are likely much more than that. And that’s what institutional investors have seemed to catch on to. This may explain why Tesla is priced similar to a high-flying tech stock. And it can also explain why Nikola is priced more like a hydrogen stock, albeit a very well-performing one.
The question that investors have to ask is if this makes Nikola an investable company in the short term?
This is Where GM Fits In
In my opinion, this is good news and bad news for Nikola investors. The good news is that with General Motors (NYSE:GM) on board, Nikola has institutional knowledge and infrastructure to manufacture its electric and hydrogen fuel cell trucks at scale.
The bad news is that it may make the Hindenburg reports argument for them. That is, without GM on board, how far along in the process was Nikola?
That’s a fight for others to decide. And as Josh Enomoto writes, the fraud allegations are really more of an issue for GM. For its part, GM has told investors it conducted “appropriate diligence.”
But as an investor, the question you have to ask is will this partnership allow Nikola be able to bring a truck to market? If it does, then the rest is mostly noise.
Nikola Stock is a Bet On Hydrogen
Trevor Milton is a big believer in hydrogen. And with the birth of Nikola he took a bold and controversial, but also innovative approach to one of the underlying problems with hydrogen. Building hydrogen fuel stations has never been an “if you build it, they will come” scenario. For hydrogen fuel cell technology to go mainstream, the lock and the key had to exist simultaneously.
That is the path that Nikola is pursuing. To have fuel cell trucks but also to have a network in place for those trucks to refuel.
I’m not endorsing fraud. And if the allegations against Nikola are true, we’ll all know soon enough. But most investors were falling over themselves to buy Nikola stock on the idea that this was an automotive play. But Nikola has always been more of a bet on the future of hydrogen fuel cell technology. Its ambitions for fuel cell trucks was just a way of creating a market for its hydrogen fueling stations.
And now that investors have a chance to take a breath, you can assess the company with fresh eyes. Beauty will be in the eye of the beholder.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.
