A few months ago, it seemed like auto manufacturing start-up Nikola (NASDAQ:NKLA) would take the renewable energy sector by storm. However, September’s bombshell short report from Hindenburg Research has seemingly put that conversation to rest. The report raises serious questions about the company’s integrity and long-term outlook. On top of that, its $2 billion deal with General Motors (NYSE:GM) may be at risk, which could prove to be a significant blow for the company. Since the report first surfaced on Sept. 10, Nikola stock is down 56%.
The report has led to a series of negative events for Nikola. The U.S. Department of Justice is now investigating for the “intricate fraud” reported by Hindenburg. The research firm alleges that that Nikola’s One Truck is essentially a farce along with its proprietary battery technology. Though Nikola vehemently denied the accusations, the reputational damage suffered by the company is massive.
With limited manufacturing and technological capabilities, the company is heavily dependent on third-parties. Therefore, such a blow could prove to be insurmountable.
Nikola-GM Deal Is Up in the Air
Nikola’s investors’ significant concerns are that the reputational damage could potentially sabotage negotiations with GM. In early September, GM announced negotiating a strategic partnership with Nikola worth $2 billion. As part of the deal, GM would manufacture the Nikola Badger, which is Nikola’s first pickup truck. Additionally, GM would exclusively provide fuel cells for Nikola’s semi-trucks. However, the Hindenburg report has cast a shadow over the potential deal leaving Nikola in a precarious spot.
GM states that the negotiation is still ongoing but after missing its initial deadline of Sept. 15. Nikola’s CEO, Mark Russell, downplayed the deal’s importance to Nikola, which indicates a weakening relationship between the two companies. He said in an interview that “The Badger was an interesting and exciting project to some shareholders, but our institutional shareholders are mostly focused on the business plan,”
GM can provide massive support for Nikola in an increasingly challenging clean transportation industry. However, it seems that the chances of the deal falling through are exceptionally high. Both companies have the option to walk-away if nothing materializes by Dec. 3.
Moreover, Nikola’s plans to develop hydrogen refueling stations with the energy business’s bigwigs will be affected. Building refueling stations on its own would be incredibly expensive for the company, costing anywhere from $1 million to $2 million a station.
Challenging Time Ahead
Things aren’t looking too great for Nikola ahead. The Hindenburg report resulted in irreversible damage to the company’s image. Now the relevant authorities will investigate, which likely will spark more sell-offs. Moreover, it also exposes the seemingly groundbreaking technology to second thoughts. Reliance on GM’s battery and hydrogen fuel systems has taken away its singular appeal. Additionally, it could have to scrap its Badger plans if GM’s deal doesn’t culminate.
The company is also among some stiff competition in auto giants such as Tesla (NASDAQ:TSLA) and Toyota (NYSE:TM). Both companies have a proven track record of generating healthy revenue and are investing heavily in clean energy, including hydrogen fuel cell technology. Moreover, in association with part-owned Hino Motors, Toyota has also announced that it will release its hydrogen-fueled semi-truck by 2021. The next few months will be critical for the company in determining its future direction.
Final Word on Nikola Stock
Nikola found it hard enough to survive in the competitive EV space until it was smashed entirely by the Hindenburg Report. Official investigations are now underway, and such a negative hit to its reputation casts doubt on its future.
The GM deal seems shaky at this point, and with Tesla and Toyota breathing down its neck, it’s tough to see how it can navigate from its predicament.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
