When the futuristic, glittering Nikola trucks and the equally shiny Badger pickups were first advertised for sale, car enthusiasts all over the world were in awe. The US start-up Nikola promised to bring together the muscular world of horse-power-oomph with environmental saintliness. Zero emission, heavy-duty vehicles all of a sudden looked as sexy as a Tesla. When the company went public in May this year, retail investors saw the future in metallic colours and catapulted the stock into the stratosphere. Without having ever sold a single car, Nikola’s market capitalisation reached $29 billion within weeks, eclipsing Ford and Fiat Chrysler.
Well, we know how the fable of the Badger and the bear market ended. Today, the once high-flying shares have crashed to earth, worth a third of their June valuations. The bubble was pricked by an analyst at short seller Hindenburg Research, which doubted the technological advances touted by Nikola founder Trevor Milton in an endless stream of social media boasts, quite in the mould of Tesla-founder Elon Musk.
Hindenburg showed that none of the claimed in-house expertise existed in reality, pointing out with Schadenfreude that promotional videos featuring the futuristic trucks were filmed with the vehicles rolling downhill – pulled by gravity rather than the non-existent battery and fuel cell engines. It certainly added piquancy that the historic Hindenburg of 1937 had exploded in a fireball of hydrogen.
The story can teach us a few lessons about the workings and pitfalls of today’s stock market, and I do not just mean the obvious ‘the emperor wears no clothes’, stressed by failing value investors. We are irked by Tesla’s market capitalisation of $400 billion, exceeding most big car manufacturers combined, particularly when we did not invest a year ago when its shares were worth one-eighth of today. Such stretched valuations are ridiculous indeed, yet both Tesla and Nikola aren’t naked.
Nikola came to the stock market in a peculiar fashion, as a reverse takeover by a so-called SPEC, a ‘special purpose acquisition company’. A SPEC is a shell company already listed on an exchange with nothing more to show for itself than a bag of money collected from feverish investors and an illustrious board of directors promising to buy something of enormous potential in the near future. It lists private companies by merging the money bag with the unlisted firm, avoiding a lot of the usual scrutiny of a traditional IPO. It is a product of our feverish times, buying a pig in a poke.
In Nikola’s case, the case was strong. VectoIQ, the shell company used to take the start-up public, was set up by the former vice-chairman of General Motors, Steve Girsky. A petrol head like Girsky must know a thing or two about cars, retail investors assumed, already hooked on the Twitter hyperbole of Nikola CEO and chairman Trevor Milton, who is now being investigated for misleading stock market investors.
The trucks were pulled by gravity rather than the non-existent battery
Shortly before the Hindenburg revelations exploded, Girsky contrived a share participation of his old employer GM in Nikola, linking the downward-sloping legacy car maker with the downhill rolling Nikola trucks. GM’s boss Mary Barra, an experienced engineer, all of a sudden looked as foolish as the duped retail investors, accused of “not doing her homework”. At first sight, things look bad for her. GM’s 11 per cent share holding in Nikola, valuated at $2 billion, was worth only half a few days later.
Yet Barra didn’t wiggle out as she probably could have done with fraud investigations pending. On closer inspection it turned out that GM had ‘paid’ for its share in Nikola by merely agreeing to supply two billion worth of components and engineering to the trucks, empty of any technology of their own. Nikola further agreed to reroute 700 million of the cash piles obtained from frenzied investors to further purchases from GM, and consented to transfer 80 per cent of its EV credits – generous state aid paid to stimulate emission-free transport, even for Tesla still the main source of profit.
In fact, GM has paid very little to quietly take over the mantel of ‘technology-of-the-future’ myths so long denied to them by the markets, despite sizeable advances in their research and development of battery and fuel cell driven motion. GM was not alone. The German car part supplier Robert Bosch GmbH, Romeo Power Technology of the US and CNH Industrial, the maker of Iveco trucks, have for the last few years worked hard to put functioning technology under Nikola’s empty bonnet.
Legacy car makers like Volkswagen, Toyota, or General Motors have long struggled to catch up with Tesla’s real, technological head start and its unreal hype. Nikola was for GM, Bosch et al the magic cloak to steal their way into the limelight.
The upside for Nikola, the empty company, is that its designs could be rolled out much more reliably than Tesla, as it can rest on already existing factory floors.
Milton, like a latter-day Barnum, was the ultimate American showman. Promising to “revolutionise” batteries and fuel cells, pledging to cut the cost of hydrogen production “by 81 per cent” and to roll out networks of hydrogen gas stations all over the US, he was certainly over-promising and under-delivering. But the oldies played along. Had not Elon Musk succeeded to build a serious car company out of sheer hype? They hoped that Trevor Milton, now sent packing, would do the same.
Nikola’s Badger pickup truck is a compelling fairy tale. Boasting 906 horse power, accelerating to 100 kph in 2.9 minutes and having a range of 600 miles may sound like snake oil selling, yet the technology is real: by combining hydrogen power with battery-driven propulsion, range anxiety could be a thing of the past.
What I have learned from this tale of the Badger and the bears is that in post-Corona markets, frightened investors will rather send single shares or specific sectors into the abyss than turning against the markets as a whole. Bears are sharpening their claws for some victims, not for all. With interest rates at rock bottom, they have nowhere else to go.
Further, I’d suggest beware of SPECs, no matter how illustrious their figureheads may look.
And finally, before we start to believe that very soon Tesla will be the only car manufacturer on Earth, look out for the incumbents. They might have another as up their sleeves. A resurrection of Nikola could be a surprise beginning, even though its $10 billion valuation today, after the Hindenburg disaster, still looks tall for a car which so far is only powered by gravity.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer, Independent journalist based in Malta