Electric vehicle stocks are all the rage in 2020, yet Nikola (NASDAQ:NKLA) is in danger of missing out on a more substantive, long term move. Yes, NKLA stock is higher by 170.64% year-to-date, but looks can be deceiving.
Even the 42% gain for the month ending Nov. 27 comes with plenty for investors to ponder. A lot of the recent bullishness is attributable broader ebullience in the burgeoning EV space and investors willing to lay wagers on finding the next Tesla (NASDAQ:TSLA). The big difference between Tesla and Nikola is the former actually produces EVs and generates revenue. The latter does not.
Those familiar with Nikola know about the General Motors (NYSE:GM) overhang. The simple explanation of the situation is this: GM is committed to bolstering its EV business and previously floated the idea of a partnership on that front with Nikola, accounting for much of this year’s acceleration in NKLA stock.
However, this isn’t a relationship GM needs and, in recent months, the Detroit giant is stand off-ish regarding how things will proceed with Nikola. Conversely, this is a deal the aspiring EV maker needs to come to fruition to assuage jittery investors.
Matters Made Worse for NKLA Stock
Speaking of matters that NKLA stock investors shouldn’t be deceived by, Thanksgiving week is a perfect example. The shares jumped 6.48% in the holiday-shortened week. In the trading days before and after the holiday, the stock lost about a quarter of its value.
The primary issue behind those declines was, not surprisingly, the GM situation. Last week, Nikola announced the signing of a non-binding memorandum of understanding (MOU). The pivotal words there are “non-binding” and a statement issued on the matter doesn’t mention anything about GM taking equity in the EV maker. Translation: The MOU isn’t a positive for NKLA stock and recent price action confirms as much.
There’s another risk regarding the GM relationship perhaps falling apart. The Securities and Exchange Commission (SEC) and the Justice Department are investigating allegations that Nikola may have misled investors. If the primary reason to own the stock, that being a tie up with GM, goes by the way side, it’s possible those regulator inquiries gain momentum.
Predictably, there’s plenty of skepticism among Wall Street analysts. JPMorgan analyst Paul Coster said as much.
“(Nikola’s) CEO has been consistently non-committal regarding the Badger initiative, in our view, and we are skeptical that it will proceed given that it is not a strategic initiative for Nikola and it could drain the company of cash needed for the Class 8 truck initiatives,” wrote Coster in a recent client note.
Another Issue to Consider
Nikola’s lockup period ended on Nov. 30, meaning early investors and insiders finally have a chance to liquidate their equity holdings, hauling in some cash in the process. Rare are the examples of newly public companies emerging from lockup expirations unscathed and recent history confirms such events do weigh on firms born out of mergers with special purpose acquisition companies (SPACs) as is the case with Nikola.
Currently, there are about 171 million shares freely floating Nikola shares on the market, but Deutsche Bank estimates that figure could increase by 130 million by virtue of the lockup period ending. JPMorgan’s Coster estimates the tally will jump by 161 million.
What could prove telling for investors is how much, if any selling CEO Mark Russell and controversial Nikola founder Trevor Milton engage in. For now, it’s just speculation, but rampant selling by those two could signal the deal with GM isn’t happening and that more downside looms for NKLA stock.
Milton’s plans for his equity aren’t immediately clear, but he owns 91.6 million shares. The stock slid 15% on the day the lockup period ended. Those in the know when it comes to short selling are saying the borrow fee on Nikola will likely drop in the wake of the lockup expiring.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
