When publicly traded companies get in big trouble, the problems don’t necessarily blow over once there’s a changing of the guard. Witness Wells Fargo (NYSE:WFC), which still hasn’t reclaimed investor confidence following the 2016 account fraud scandal that took out CEO John Stumpf and community banking head Carrie Tolstedt. Fast forward to 2020 and even though founder Trevor Milton is out at electric vehicle maker Nikola (NASDAQ:NKLA), investors shouldn’t be dumb enough to think that marks an end to the perils Nikola stock faces.
The unraveling started on Sept. 10 with a bombshell report by Hindenburg Research that accused Nikola and Milton of perpetrating a broad-ranging fraud through “an ocean of lies.” It was impossible to ignore given the text messages, recorded phone calls and behind-the-scenes photos the report cited.
Perhaps most embarrassing as visuals go: The Hindenburg investigation singled out a video, “Nikola One in Motion,” where the vehicle was supposedly towed to a remote hilltop and “simply filmed rolling down the hill.” So it’s been for Nikola stock as well, plunging by half since the report. Will the downward drift end in a crash? The potential fallout deserves closer scrutiny.
Nikola Stock and the Heart-Stopping News
Supposing you put aside Nikola’s pre-revenue, pre-sales, pre-ready-for-prime-time status, its deficiencies still flash more red and insistent than a pesky check engine light. Within a week of the Hindenburg Crash, if you will, the Securities and Exchange Commission announced a probe into the fraud allegations and the Department of Justice began its own investigation.
The explains in large part why shares remain depressed. Trading at just below $19 a share, Nikola stock spent the month of October tanking. So what happens next?
For my own part, I’d pay much more attention to the government investigations and any potential follow-ups from Hindenburg than financials or quarterly reports. The probes are just getting started and no one should pretend Milton has simply gone away.
Milton Still a Shareholding Force
The alleged mastermind of the supposed fraud still owns 91.6 million shares of Nikola stock — currently worth $1.7 billion –and will serve as an unpaid consultant through the end of the year. Officially, Milton’s been stripped of any say in the company’s operations.
Unofficially, anyone who owns 91.6 million shares remains a shareholder colossus no one at the company will dare to ignore.
Call me a deep skeptic, but as long as Milton uses funky hand signals or talks in World War II Navajo code there will be no record of anything he “tells” Nikola to do. Why is this important? Because if the malfeasance charges leveled against him are true, you’d in theory put your investment dollars in the hands of a fraudster who could just as easily lie about being hands off. Yes, he may in fact stay away. But I wouldn’t count on it.
Counting on a Major Automaker
The one and only sliver of light for Nikola stock is that General Motors (NYSE:GM) is pushing ahead in partnership talks that will give it an 11% stake in the EV maker. This baffles me. But that doesn’t mean it lacks for plausible explanations.
For starters, big companies do all sorts of nutty things and often act on the irrational motivation of saving face. Think of it this way: What do you think would happen to me if I showed up at the GM C-suite and urged them to do business with an unproven upstart being investigated by two federal bodies, including the Justice Department?
It’s fantasy football but it would be a PR person’s Super Bowl trophy to see GM team instead with Lordstown Motors (NASDAQ:RIDE), currently in the process of turning GM’s colossal, abandoned Ohio plant into an EV nerve center. Instead, you have a major automaker willing to talk turkey with a disgraced company that has only proven, if the allegations hold water, that it knows how to cheat.
Anyways, it can’t hurt that Nikola’s new chairman, Stephen Girsky, is a former GM vice chairman.
Too Toxic an Investment to Touch
Even if the federal investigations bear no fruit; even if Nikola transcends its troubles, even if GM snatches victory from the jaws of vehicular defeat, can you name one good reason in the present for investing in Nikola stock? I can’t. Forming a new company is risky enough. This one hasn’t sold a single vehicle. Or produced a single dime of profit.
Instead, Nikola stock has heretofore benefitted in large part from belonging to a sector rife with speculation and fevered emotion. Public and private companies all over the world strive to win investors’ hearts with bold proclamations that electrical vehicles represent the future. I believe this. But that doesn’t mean I see universal profits and shareholder return in that future.
Just as I wouldn’t want my daughter to date someone the feds have their eyes on, I cannot in good conscience recommend that you spend your money on Nikola stock. If you want to know when I’ll change my mind, stop back when Nikola and Milton have been cleared of all wrongdoing.
Meanwhile, it boggles my mind to think Nikola’s vehicles may have used gravity to drive downhill in a video. Whether or not that’s true, Nikola stock faces a major uphill climb — and making it would be the investment equivalent of defying gravity.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
