General Motors (NYSE:GM) announced a delay in its deal to acquire 11% of Nikola (NASDAQ:NKLA) stock. Nikola’s management quickly stepped in the following day to calm investor fears, sending shares up 30%. But don’t be fooled – the embattled electric truck maker isn’t out of the woods yet.
Instead, Nikola’s future now looks precariously reliant on GM. If GM decides to continue the relationship, that could send NKLA stock soaring to $60.
But if the legacy carmaker chooses to walk away, the smaller upstart will struggle to survive as other partners drop out.
It’s make or break time for NKLA stock.
NKLA Stock: In Hot Water
In September, General Motors surprised investors by announcing a partnership with Nikola, an upstart electric truck maker. In the deal, GM would receive 11% of Nikola stock. In exchange, the legacy car maker would share its propulsion technology and manufacturing capabilities. In other words, GM would build Nikola trucks.
The next day, short-seller Hindenburg Research issued a scathing report on Nikola and its founder, Trevor Milton. Hindenburg claimed that Milton grossly inflated his firm’s technological capabilities and lied to investors. Further research has since unearthed confirming evidence, suggesting Nikola stock could be worth zero.
I’ve written the truism that electric vehicles have “always been built on a series of lies.” General Motors invested in Nikola for the EV marketing buzz, not for its technology; the Hindenburg report wouldn’t change the facts, I believed.
But I was wrong. As allegations of Milton’s misdeeds begin to include sexual assault, it’s starting to matter. A lot.
NKLA Stock: Awaiting a General Motors Decision
Two women filed formal sexual abuse complaints against Milton. His cousin and a former office assistant claimed that Milton had sexually assaulted them when they were each teenagers. These are grave allegations. And though he has already resigned from day-to-day management of the company he founded, the reputational stain will have long-lasting effects.
Uber (NYSE:UBER) faced a similar meltdown in 2017 when former employee Susan Fowler wrote an open letter outlining the company’s stunningly toxic work environment.
“It was clear that he was trying to get me to have sex with him,” Fowler said of her manager. On reporting the incident, however, “upper management told me that he ‘was a high performer,’ and they wouldn’t feel comfortable punishing him.” As allegations of CEO Travis Kalanick’s personal history of sexual harassment also multiplied, the company struggled. 2017 sales rose just 42%, compared to Lyft’s 103% as boycotts hit the company’s top line.
Today, Nikola finds itself in the same situation. The Hindenburg scandal was already damaging, but Martin’s sexual harassment scandal made things even worse. Nikola has now lost BP (NYSE:BP) as a significant partner. GM could be next.
What NKLA Provides for GM
There’s some hope that the deal will still go through. That’s because GM needs Nikola.
GM has always had issues with marketing its electric vehicles. Despite having one of the most advanced EV R&D of the major carmakers, it’s lagged Tesla by a long shot. For every Chevy Bolt GM sold, Tesla managed to sell 22 vehicles. There’s growing concern that GM’s planned slate of 20 new EV models by 2023 could face the same future.
And with hydrogen fuel cells, the challenges are even more significant. Fuel cell technology needs specialized refueling stations, which means there’s an enormous first-mover advantage. To gain a foothold for its Hydrotec fuel cells, GM desperately needs marketing buzz. That’s something that Nikola might have provided.
But now that’s all up in the air.
What’s Nikola Worth?
Bringing a new vehicle to market can cost $1 billion or more, with 60% of the investment going towards building car factories. That’s why many automakers often collaborate to introduce new technologies, such as self-driving vehicles. But without that aid, Nikola could eventually go bankrupt. The company has just $700 million cash from its 2020 IPO.
If the company can’t beat competitors like Hyundai or the Volvo/Daimler joint venture to the hydrogen fuel-cell trucking market, it could find itself out of luck.
On the other hand, if GM decides to move forward, Nikola investors stand to gain handsomely. Assume, for a moment, that Nikola grows to $13.4 billion revenue by 2029 with 20.7% EBIT margins and gives up 20% equity to GM (instead of the original 11%). In that case, a 2-stage DCF model shows a fair value of Nikola stock of $62, or a 150% upside.
Is NKLA Stock a Buy?
Investors should watch for Dec. 3. If no deal gets reached by then, either company can walk away without penalty. In other words, GM has an incentive to run down the clock and get better terms from the deal. The longer they wait, the more information the SEC panel may also provide.
Until then, Nikola investors should keep a close watch on how the negotiations pan out. The startup EV’s future depends on it.
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.