Nikola (NKLA) in Turmoil – What Should the Shareholders Now Expect Amid Allegations of Another Theranos in the Making?
Nikola Corporation (NASDAQ:NKLA) shares continue to experience epic volatility, fueled by wild price swings as a result of dramatic developments over the past couple of days. The pre-revenue company is currently facing perhaps the most arduous challenge of its corporate existence, resulting in pitched battles between the bulls and the bears not only on the stock exchange but also on Twitter and other social media platforms as investors try to justify their individual thesis on what the future holds for Nikola.
While the situation remains as obfuscating as ever, Nikola bulls believe that the company is being unfairly targeted by short-sellers. On the other end of the spectrum, the company’s detractors perceive it as a horrendous reincarnation of the infamous Theranos saga. In today’s post, we’ll try to assess the prevailing situation objectively and then synthesize what this endless parade of allegations and counter-allegations means for the stock price.
First, let’s take a cursory stock of the current situation. Early last week, Nikola super-charged the bullish sentiment in its shares when it announced a strategic partnership with General Motors (NYSE:GM). We have covered the minutiae of this arrangement in a previous post. To summarize, GM will provide batteries, fuel cells, and other essential components for Nikola’s Class 8 electric trucks. The auto giant will also manufacture the company’s much-anticipated Badger electric pickup truck. In return, GM will receive an 11 percent stake in Nikola worth around $2 billion. It will also receive another $2 billion as compensation for providing services as well as access to key parts and components, including $700 million in production-related costs. Finally, GM will receive the lion’s share of the tax credits that will be generated by retailing the Badger truck. On the 8th of September, when this deal was announced after the extended holiday weekend, the stock jumped by an astonishing 40 percent relative to the closing price of $35.55 registered the week before.
However, things took a turn for the worse when Hindenburg Research published a scathing report on Thursday (10th of September), leveling two major allegations against Nikola. The first asserted that Nikola, contrary to its public claims, does not possess any revolutionary or proprietary technology concerning batteries and hydrogen fuel cells, as illustrated by the fact that it is utilizing GM’s under-development Ultium battery system and Hydrotec fuel cell technology for the Badger pickup truck. The second allegation alluded to Nikola’s supposed proclivity of employing deliberate deception as modus operandi. You can gain further insight by heading to our dedicated post on this subject. Thereafter, on the 11th of September, Citron Research also publicly came out in support of Hindenburg’s findings against Nikola.
Congrats to Hindenburg for exposing what appears to be a total fraud with $NKLA. Citron will cover half of all legal expenses. You can’t SLAPP the truth away. Explains why Milton sold at $10 this June $NKLA response warrants an SEC investigation to maintain integrity of EV mkt
— Citron Research (@CitronResearch) September 11, 2020
While these allegations were quite damning in their own right, Nikola’s bungled response added fuel to the proverbial fire. First, the company’s Executive Chairman, Trevor Milton, announced on Twitter that he would provide a formal rebuttal to Hindenburg’s scathing attack in the latter part of Thursday. The timeline for this anticipated rebuttal then shifted to Friday:
Been working on rebuttal of hindenburg for 14 hours to provide a clear, factual, low-emotional answer to the report. It will be out before market opens and working through the night. I feel great about every answer. They wanted max damage, it didn't work. Now back to growth.
— Trevor Milton (@nikolatrevor) September 11, 2020
On that day, however, Nikola published a brief statement, vowing to initiate legal action against the research house. Trevor Milton took to Twitter in order make this announcement:
Nikola retained outside counsel Kirkland & Ellis LLP and authorized them to reach out directly to the SEC. The allegations are false and deceptive. On advice of counsel however, I won’t comment further now other than saying that we have involved SEC. It is in their hands and i pic.twitter.com/k1Cz3Hymca
— Trevor Milton (@nikolatrevor) September 11, 2020
Absent, however, was the razor-sharp retort that the wider public was expecting. This development precipitated another major round of selloff. As an illustration, Nikola shares ended the week down 40 percent relative to the intraday peak of $53.98 reached on Tuesday, effectively eliminating the entire upside generated through the momentous announcement of a partnership with GM.
Before expounding on what scenario Nikola investors should now expect in the coming days and weeks, let’s address the proverbial elephant in the room – the company’s supposed symmetry with the infamous Theranos saga. As a refresher, Theranos was the subject of phenomenal interest a couple of years back as the company claimed to have devised proprietary blood tests using its bespoke automated devices that required only a fraction of the blood volume required by generic lab-based testing. The turning point, however, came in 2015 when two medical research professors along with the Wall Street Journal’s John Carreyrou raised serious questions regarding the viability of these proprietary blood-testing devices. This dramatic exposé unleashed a number of lawsuits as well as punitive measures from the SEC. As the metaphoric curtains dropped at the conclusion of this saga, the high-flying CEO of Theranos – Elizabeth Holmes – lost virtually the entirety of her $4.5 billion fortune.
Now let’s examine Nikola’s case in this backdrop. On the surface, the two companies are very much comparable. Trevor Milton and Elizabeth Holmes share a penchant for expounding the virtues of their companies, incurring personal benefits in the process. Both have a somewhat complicated relationship with simple truths, often resorting to hyperbole in order to generate hype. However, their cases differ in one crucial aspect – technological viability. While Theranos was likely peddling a dud product akin to the perpetual motion machines littering the shady corners of the internet, Nikola now actually has a viable path toward delivering on its hyped promises as a result of its much-touted deal with GM. In a crucial caveat, however, GM’s proprietary battery and hydrogen fuel cell technology is not yet ready for commercial deployment. Nonetheless, GM’s association with Nikola does carry weight, reducing much of the associated skepticism in the process. Of course, key questions persist regarding Nikola’s own hyped claims of bespoke battery tech and other integral components. To sum this up, while Nikola has much to answer for, it likely has not perpetrated a Theranos-scale fraud.
As far as the way forward for Nikola shareholders is concerned, it will likely involve much toil and pain. The one thing that markets absolutely abhor is uncertainty. Given Nikola’s current strategy of involving the SEC in its feud with Hindenburg Research and the glacial pace at which this process moves, uncertainty – and loads of it – will be the order of the day for the Nikola stock. When coupled with Trevor Milton’s erratic tweeting patterns, the company’s bulls should brace for wild whipsaw moves and gyrations. Of course, much of this prevailing uncertainty can be resolved if Nikola produces evidence of its Class 8 electric trucks utilizing on-board propulsion. We would not wait for this development with bated breath though. Moreover, all hell will break loose if GM ever decides to step away from Nikola as this partnership is now the only bulwark propping the embattled company.
In the meantime, Nikola bulls may seek solace in the following quote from Baron Rothschild, an 18th-century British nobleman and a member of the Rothschild banking family:
"The time to buy is when there's blood in the streets."
For Nikola’s detractors, the allegations by Hindenburg and Citron may serve as an effective vindication. Either way, Nikola is not about to turn boring anytime soon!
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