So far, September has been a volatile month for investors in Nikola (NASDAQ:NKLA) stock. Following the announcement of a partnership with General Motors (NYSE:GM) on Sept. 8, Nikola stock initially surged over 50%. But then came the news that short-seller Hindenburg Research was accusing Nikola of fraud.
Recent research led by Rene Bohnsack of Catolica Lisbon School of Business and Economics, and Ans Kolk of University of Amsterdam concludes:
Sustainable mobility has long been a key issue in the automotive industry, following earlier concerns about climate change, increasing regulation, and the ongoing need to meet environmental demands, also from consumers who attach much importance to fuel efficiency and environmental friendliness.
Amid this backdrop, 2020 has fast become the year when electric vehicle (EV) and alternative-fuel stocks got a lot of investor attention. This holds true even for a pre-revenue company like Nikola, which started trading only in June. Today, we’ll take a look at the partnership between the two companies to see how it could affect Nikola stock in the rest of the year.
What the Deal Means
Phoenix, Arizona-based Nikola specializes in electric and hydrogen-powered trucks. On June 4, the shares started trading at $37.55. Within a week, Nikola stock stock surged to an all-time high at $93.99. The rapid increase in price followed an announcement that the company would begin taking reservations for “Nikola Badger,” a new electric pickup truck.
Now the stock is around $42, once again giving up the earlier gains that followed the partnership announcement with GM. Put another way, the initial share price of $37.55 seems to act like a magnet for the stock after each rapid surge.
Its Q2 results released in early August showed that Nikola has not yet started commercial operations to produce its trucks. Furthermore, it has no profits related to EV operations. The quarterly revenue of $30,000 was generated for selling solar panels. The two companies are aiming for an initial production date of late 2022.
According to the deal GM will have 11% ownership of Nikola. It can also nominate one director. General Motors will engineer and manufacture batteries (both electric and fuel cell) for the Badger truck. Nikola will pay GM for the batteries and fuel cells, as well as for contract manufacturing of the truck.
In return, Nikola will oversee the sales and marketing operations for the truck and will retain the Nikola Badger brand. The contract is set to last ten years.
Despite the initial euphoria by investors in Nikola stock, analysts are debating whether the agreement benefits GM more. In fact, Jim Cramer, host of CNBC’s Mad Money, believes General Motors comes out on top.
Even before the report by Hindenburg Research came out on Sept. 11, the Street was also wondering if the details of the deal meant Nikola’s management had been too generous with their earlier claims that they had the technology to manufacture their EVs. This debate is likely to stay is the news for a while, which would could pressure NKLA shares.
What Could Be a Better Buy Than Nikola Stock?
The Street seems to agree with Mr. Cramer. Since the deal’s announcement on Sept. 8, GM stock is up about 5%. The news was welcomed by shareholders in General Motors shares, which have not had a good 2020 so far. Year-to-date, GM stock is down over 14%.
In late July, the company announced Q2 results, which showed the strength of its truck and SUV businesses. Over the past several years, it has also been building its electric vehicles business, which is still loss-making.
Many analysts have noted that GM’s efforts in the EV space were simply not as hot as Tesla’s (NASDAQ:TSLA). Therefore, this recent partnership announcement makes sense as part of the management’s efforts to yield significant results. Recent weeks have seen speculation that GM may spin off its EV business, which would mean significant value for shareholders.
General Motors has an iconic place in our industrial history. Therefore, before investing in Nikola stock, market participants may also want to do due diligence on GM stock. Management’s “Next-Gen” vehicle efforts will probably help GM shares cruise higher in the coming quarters.
The Bottom Line
The recent hype around EV stocks means retail investors and day traders chase these shares daily. Many market participants seem eager to bet Nikola stock may also become the next Tesla. However, the shares of this young company are volatile. Potential shareholders may regard a pull-back toward the $30-level or below as a better entry point.
However, if there is potentially any bad news from the allegations launched by Hindenburg Research, then there could easily be more downside to Nikola shares.
If you are ready to invest in the future of alternative energy vehicles, I believe GM may be even a more reliable name than Nikola.
Alternatively, you could possibly consider buying into an exchange-traded fund. Examples include the iShares Global Clean Energy ETF (NASDAQ:ICLN), the ALPS Clean Energy ETF (CBOE:ACES), or the SPDR S&P Kensho Smart Mobility ETF (NYSEARCA:HAIL).
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The author has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.