Nikola Corp (NASDAQ:NKLA) has turned into a short-term gamble on whether General Motors (NYSE:GM) will cut a deal with the fledgling EV maker. It’s not looking very positive for Nikola stock since the deal should have closed by now.
GM originally had a non-binding agreement with Nikola to manufacture the latter’s Badger pickup truck. That deal was supposed to have closed on Sept. 30. But all indications are that they are still negotiating.
What’s at Stake With GM
Nikola stock would fall if it does not revise the joint venture pact with GM by the time it reports third quarter earnings, now scheduled for Nov. 9. Analysts would pepper management with questions about this on its aftermarkets conference call.
Moreover, it would indicate that the company was not going to follow through with an initiative started by its former chairman and CEO, Trevor Milton.
However, some believe that GM actually needs to follow through with the deal. For example, my fellow InvestorPlace contributor Thomas Yeung, CFA, believes that GM could use Nikola’s help in marketing their electric vehicle manufacturing abilities.
In his Oct. 6 article, “GM Will Dictate If Nikola Goes To $60 or to Zero,” (which pretty much says it all), Tom estimated that Nikola stock could be worth $62 per share. That is based on a discounted cash flow (DCF) model. He assumes that GM would receive a 20% stake.
In the original deal, GM was going to get an 11% stake — “valued at $2 billion” — more or less for free, in return for manufacturing the Badger . Plus they would be paid for the actual manufacturing portion of the deal.
But that was when Nikola stock was valued at $41.93 in the non-binding joint venture. Today, Nikola is trading at $20.91, or half of the original price. As a result, the original 47.6986 million shares that GM was going to get would be worth just $1.075 billion.
GM would likely ask for more shares, at least 88.7 million shares, or 86% more than before, in order to get shares worth $2 billion. However, that would dilute their stake below 11%. It is also highly likely that GM would want a higher stake.
What To Do With Nikola Stock
Pundits have been sharp in their criticism of Nikola recently, arguing that “the GM deal looks shaky,” as it will be very difficult for the Arizona-based EV upstart to recover from its numerous controversies.
However, JPMorgan said that it is “likely” and “probable” that Nikola and GM could reach a strategic partnership deal by Dec. 3. Analyst Paul Coster said that GM needs Nikola in order to “realize a return on billions of dollars in hydrogen fuel cells.”
On the other hand, Barron’s reported on Oct. 16, that Nikola’s plans would change if GM walks away. Nikola would likely not make the Badger, a hybrid electric and hydrogen pickup truck if GM does not agree to the partnership. This was based on recent comments by Mark Russell, the new CEO at Nikola.
So, you see, it has come down to a short-term gamble, or a probability game, as to whether the Nikola-GM deal will go through. This will have dramatic effects on the Nikola stock price either way that it goes.
Most investors will not want to play in this game. It is always better to wait for a secure bargain than speculative plays when investing your money.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.