Throughout 2020 and into early 2021, electric vehicle start-ups and special purpose acquisition companies (SPAC’s) were all the rage, and Nikola (NASDAQ:NKLA) stock was a darling of the markets.
Thus, there was much fanfare when completed its SPAC reverse merger last year and during the summer of 2020, NKLA stock shot up like a rocket.
Today, however, Nikola isn’t a darling of the markets – not even close. With the company’s first-quarter 2020 results to be released May 7, the bears and critics are out in full force.
Granted, there was a scandal involving founder Trevor Milton resigning as the company’s chairman amid allegations of deceptive practices. Beyond that, there’s been talk of the U.S. government applying a greater level of scrutiny to electric vehicle SPAC’s generally.
So, it might be tempting just to give up on Nikola completely. Yet, I would propose that if the specter of a SPAC crackdown has led to peak pessimism, this is an opportunity for bold contrarian investors.
A Closer Look at NKLA Stock
As I alluded to earlier, the summer of 2020 was an exciting time to be a NKLA stock investor. The Nikola SPAC merger was finalized in June of that year, and the share price catapulted to a 52-week high of $93.99.
Nearly a year later, the stock is much lower and the bulls are on the defensive. As of May 4, 2021, the shares were trading below $11.
It’s amazing to consider that NKLA stock could actually fall below its pre-SPAC-merger price of $10. That would imply that Nikola, as a company, doesn’t have a value exceeding the shell company that acquired it.
At this point, the bulls need to be realistic. Even if the first-quarter earnings report propels the share price higher, there’s still a whole lot of lost ground to recover.
Let’s just see if NKLA stock gets back to $15 and holds that level, before targeting other key price points like $23 and $32.
Regulators vs. SPAC’s
Sometimes it feels as if the market is punishing Nikola for more general concerns over SPAC scrutiny.
It is true that in recent months, some regulators have focused their attention on SPAC’s. In particular, the U.S. Securities and Exchange Commission has brought up concerns that investors might not be fully informed of the potential risks of SPAC start-ups.
There is a safe-harbor provision that allows SPAC sponsors and targets to make business projections. In April, however, the SEC warned that the safe-harbor provision doesn’t protect SPAC businesses from SEC enforcement.
Moreover, Senator John Kennedy introduced legislation that could increase disclosure requirements for SPAC founders.
Carol Anne Huff, co-chair of Winston & Strawn’s capital markets practice, opined that a regulatory crackdown could chill the SPAC market.
“Forward-looking statements are sometimes wrong, and issuers need comfort to make projections on good faith,” Huff explained.
Fear of a regulatory SPAC crackdown probably contributed to the decline in NKLA stock.
Yet, I feel that Nikola has been punished excessively. If anything, tighter rules for SPAC’s should help to build trust between electric vehicle SPAC’s and their investors.
And let’s not lose sight of why the market liked Nikola in the first place: the company’s an audacious innovator.
Even today, Nikola continues to make waves in the clean energy space. As an example, the company just announced a partnership with Travelcenters of America (NASDAQ:TA) to develop hydrogen fueling stations for heavy-duty trucks.
The two companies are initially targeting two sites. However, they’re ambitiously exploring the “mutual development of a nationwide network of hydrogen fueling stations.”
The Bottom Line
There’s no need to punish Nikola in particular for the perceived sins of SPAC’s in general.
And now that NKLA stock is trading at a discount, it’s time to focus our attention on the company’s bold spirit of innovation – which is what made Nikola famous in the first place.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.