Nikola (NASDAQ:NKLA) has been in the news a lot lately and for all the wrong reasons. Nikola stock has been as volatile as ever as the company fights back against a short report that has the automaker’s reputation on the line.
Executive chairman and founder Trevor Milton has vocally disputed this report. The news has created a very unique situation, given that such positive news recently hit the tape in the form a new partnership with General Motors (NYSE:GM).
The Good vs. The Bad
Electric automakers were on fire coming into the summer and many have continued to do quite well. This included Nikola stock, which ran from the $20s to $94 at one point. Obviously this move wasn’t sustainable, and shares were correcting lower as a result.
The company handed over $2 billion worth of stock or 47.7 million shares of stock. It left GM with an 11% stake in the company, as it agreed to help Nikola on the manufacturing front. From the press release:
General Motors to engineer, validate, homologate and build the Nikola Badger for both the battery electric vehicle and fuel cell electric vehicle variants as part of the in-kind services.
To me, that sounds like a pretty good deal for Nikola. Hand over some stock and be connected to one of the finest manufacturers in the U.S. Building cars is no easy feat — particularly at a profit. So to have GM on board is a big win.
It’s probably got GM’s board sweating a bit with the latest headlines hitting the tape. In a short report from Hindenburg Research, they state:
We have gathered extensive evidence—including recorded phone calls, text messages, private emails and behind-the-scenes photographs—detailing dozens of false statements by Nikola Founder Trevor Milton.
They suggested the company’s battery and hydrogen fuel cell claims are “hot air,” while its order book is “filled with fluff.”
Nikola formulated its own response and said it contacted the SEC over the matter as well. However, that same day (on Sept. 14) the SEC launched a probe to see if investors were deceived. A day later, reports said the DoJ was also looking at Nikola over fraud claims.
Either way, this is not what we’re looking for when it comes to an investment.
Breaking Down Nikola Stock
Nikola has some positives here, too. The push toward electrification is enormous right now, from startups to traditional automakers. The company’s Badger pickup looks awesome and if it makes it to market, it should attract a lot of buyers. It helps that GM is on the manufacturing front, which should help qualm any quality control fears among consumers.
I love all that, but I don’t like this drama.
While probes from the SEC and DOJ may turn up empty handed, the fact that they are occurring at all is risk for investors. When other electric vehicle (EV) makers are there for the picking, why gravitate toward the one with this overhang?
If the company had a product on the market, I would feel much better. The Badger pickup is “anticipated to enter production by year-end 2022.” That’s a long ways off. The company’s Nikola Tre semi-truck for short-haul trucking is expected to “to be ready for production and available to customers by the fourth quarter of 2021.”
So at the earliest, we’re talking about a year before production and deliveries start to churn out. Aside for no meaningful revenue expected to hit the books for a while, my main problem now becomes the valuation.
We’re talking about a company with effectively no revenue, caught up in some major stock market drama and trading with a $12.4 billion market capitalization. At its high a few days ago, Nikola stock had a market cap north of $18 billion.
No way. That valuation — while at one point even higher — makes absolutely no sense at this point in time. The company hasn’t even built the building that will produce the vehicles!
Bottom Line on Nikola
Here’s the deal. I wish this company the best. I don’t know if it is a fraud or if it’s earnest. What I do know is that we’re still a long ways off from having vehicles consistently roll off the assembly line. To me, the stock was already expensive with that realization crystal clear.
While the GM deal was (and for now, still is) a positive, the SEC and DOJ don’t make Nikola stock any more attractive on the valuation front. Let’s pass on this one for other options.
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 this article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.