I’m a big-time believer in electric vehicles. But from the jump, I haven’t had the same optimism toward electric truck manufacturer Nikola (NASDAQ:NKLA). Generally speaking, my sense was that investors could do better in the sector than Nikola stock.
Certainly, valuation was one factor. As I argued back in August, investors were buying essentially a start-up at a $16 billion market capitalization. Even that figure was more than 50% below the $35 billion peak seen amid frenzied trading in June. There simply seemed to be better choices out there than an unproven company with no automotive revenue.
Nikola stock since has pulled back sharply. The controversy surrounding the company’s founder and now-former chief executive officer has been a key factor. Admittedly, I didn’t see that coming.
But the allegations of fraud haven’t been the only catalysts. NKLA benefited from something close to a bubble this summer. The fact that the stock has cratered from that peak is not terribly surprising to those of us who know the EV industry well.
Add in those allegations, and Nikola stock clearly is a no-go, even after what is now a 70%-plus decline from its highs.
Still a Startup
With Milton gone, it’s tempting to look at Nikola stock as a potential buying opportunity. The heat surrounding the stock should fade. Short-sellers like Hindenburg Research, whose initial report last month raised significant questions, at some point will cover and move on.
There’s still a business here. There’s still a significant partnership with a major automotive manufacturer. The opportunity for electric semi trucks remains.
But the core question that held regarding NKLA before Milton’s departure still holds. What, exactly, are investors buying? This is a company that generated just $95,000 in revenue in the first six months of this year. According to a filing with the Securities and Exchange Commission, all of it came from installing solar panels at Milton’s home.
Nikola still is an idea. It’s not yet a business. And Milton’s departure significantly colors the value of that idea.
A Matter of Trust
After all, this was supposed to be an innovative company with the potential to revolutionize the trucking industry. It doesn’t look that way anymore.
Nikola has admitted that a video of its truck moving was staged. (The company claims that the video of the truck was never explicitly framed as being self-propelled, and that private investors at the time were not deceived.)
It has denied that it tried to pass off third-party inverters, a key part of the electric powertrain, as its own. But as industry site Electrek pointed out, the company was not entirely truthful in denying that it had claimed the inverter in a video was developed in-house. Milton, then still the head of the company, said as much in the video.
Similarly, the denial of Hindenburg’s claim that the company passed off a “pusher” (i.e., a truck that couldn’t be driven on its own) as a real truck rings hollow.
The problem with both claims is that they undercut a key part of the post-Milton bull case. That case has to be based on the idea that investors couldn’t trust Milton — but now, under new leadership, they can trust Nikola.
It’s tough to make that case when the company is still dancing around the allegations. It’s difficult not to come to the conclusion that Nikola at the least was being misleading. If new leadership would admit to that, we could all move on. Since they won’t, it’s difficult to put much faith in the company going forward.
What’s Left for Nikola Stock?
It’s worth repeating: there’s still a bull case here. Nikola still has put in years’ worth of research and development. The potential opportunity is massive.
But if investors are going to bet on an early-stage company — which Nikola unquestionably is — they have to trust that the company can capitalize on its opportunities. Between recent events and Nikola’s response to those events, it’s tough to have that trust.
That aside, we come back to the key question. What, exactly, are investors in Nikola stock buying? They’re getting trucks that don’t yet work. They’re getting inverters that will be developed at some point. The truck design allegedly came from a third party as well.
It still seems like $9 billion is an awful lot to pay for those intangible assets. Until Nikola can prove that it has an edge in electric truck development and regain investor confidence, Nikola stock will be unable to propel itself.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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