One of the most exciting stories of 2020 happened this week.
Fraud, lies, corruption, phony capitalism and the energy transition are all in play.
Nikola is one of the most exciting investment stories of the year.
It announced early this year that it would be gaining a public listing on the stockmarket through a reverse merger with a special purpose acquisition company (SPAC). At the time these were mostly unheard of, but now they’re all the rage.
Essentially, there are shell companies with blank cheques, in this case $500 million, which offer an easy route to the stockmarket for private companies seeking to bypass the lengthy and costly initial public offering (IPO) process.
James Allen recommended it in his energy investing service, Exponential Energy Fortunes, as soon as the potential merger was announced. Shares in the shell company, which would become Nikola, were at $10 at the time.
By the time the merger was voted through and enacted a couple of months later, the share price has risen to roughly $34, so already an incredible return for such a short period of time.
Hydrogen has been the knockout investment theme of the year. Governments have thrown their weight behind the industry, and small players have been boosted 100s of per cent in months.
So when Nikola, which touts itself as the Tesla of trucks and the leader of the hydrogen revolution in transport, hit the stockmarket, the growth investing mania had found its new darling.
It doubled again within a week, rising to well over $70.
These were signs of madness, but there was a grain of truth at the bottom of this little boom. Nikola was targeting the perfect segment – heavy duty trucking. Within transport, that is where hydrogen has the most hope, and batteries are expected to have the most trouble because of weight and duration concerns.
For heavy duty trucking, longer range, fast refuels and lower weight are far more important than for you or I driving around town or doing the school run.
Nikola also has a very interesting concept of taking ownership of the refuelling infrastructure as well of the vehicles, and has engaged leading hydrogen firms to build hydrogen refuelling stations across the US.
It’s like if Shell was making its own cars, creating its own demand, or if VW also owned petrol stations, thus claiming even more of the automotive value chain.
What’s more, it has looked at Tesla’s first ten years and realised that the real problem it had was building and scaling its own manufacturing capacity. Why go through all that trouble, when there were plenty of existing, capable and willing major manufacturers who are all looking for a way into vehicle electrification, asked Nikola’s CEO, Trevor Milton. He said that was why Nikola was looking to outsource production of its vehicles to the likes of Bosch and CNH Group.
Finally, Nikola’s cohort of partners – Bosch and Iveco among others – are a collective endorsement of its potential. Anheuser Busch has orders with Nikola, and the US Department of Energy has given it multiple research grants for developing its vehicles and technology.
But nonetheless, despite all these promising aspects, $70 per share and a company valuation around $25 billion was just too dear.
James advised his cohort of Exponential Energy Fortunes subscribers to sell out (for a 600% profit in under six months). We had thought that Nikola (which has itself stated it isn’t hoping to mass produce trucks until 2021/2) was more of a speculative, long-term investment, but it has rewarded instantly.
And lucky we did, because as the excitement of the SPAC merger subsided and reality kicked in (Nikola, with zero trucks delivered to customers, was at one point valued higher than Fiat, which sells 2.2 million vehicles per year), the stock fell 50% to around $30-$40.
There was a lot of hot air spoken, and the founder was very vocal on Twitter, especially with regard to critics and short-sellers, which raised a few hairs on the back of my neck given my deeply-held suspicion of Elon Musk.
Lots of conservative investors wanted to point and laugh, to cry “bubble” and criticise hydrogen as a fuel of the future too.
In this period, James and I would speak regularly about it, as with other closed positions which have fallen in price.
Because if something has fallen a fair bit since you sold it, it might come back into buy territory once more, and with Nikola down from $75 to below $30, this case could certainly be made.
In fact, James even wrote up a draft buy recommendation for subscribers, but a few things held him back.
There were some lingering concerns about the company and about its valuation.
Under normal circumstances, going from $10 to $30 in six months still counts as an extreme move, aside from the fact it surpassed $70 in the interim.
Anyway, last week Nikola jumped. It went up big – 50% in a day, before falling back to where it had been within days.
It had announced a partnership with General Motors, which is what sent the price rocketing up. GM took a large stake in the business, and agreed to manufacture the badger truck, Nikola’s electric pick-up.
GM will also place one of its own on Nikola’s board, which I see as a great coup for the early-stage auto company. Kind of like winning a dragon in the den.
That day though, I saw something unusual on Twitter…
Source: Hindenburg Research, on Twitter
My mind jumped immediately to Tesla, in hope more than anything, but no.
It was Nikola, and the very next day IT released a huge report with a wide array of accusations against the company.
The stock has duly dropped big three days in a row, and is back down to $30, having been higher than $50 just last week.
Milton, the Nikola CEO, responded angrily on Twitter, and since then a number of weird things have happened.
Firstly, a bunch of his old tweets disappeared, going back to the start of June, but he has loudly exclaimed it’s a Twitter fault and that he didn’t delete them.
Next, he said that he would stay up all night writing responses to all the questions Hindenburg had posed at the end of their piece, but then went back on this, having turned to lawyers and the US Securities and Exchange Commission (SEC) instead.
When Nikola did release a response, it mostly said, “Who you gonna believe?” and “Yeah we did lie but you didn’t really think we meant that, did you??”
For example, Hindenburg alleged that Nikola’s promotional video of its Nikola One truck driving along a road was actually not a functioning vehicle, and had just been rolled down a very gentle hill to give the impression of self-propulsion.
Nikola’s response… admitted this, saying that surely no one had thought that its video of its truck driving along a flat road was trying to show that it was a functioning hydrogen fuel cell truck.
Hindenburg has since described this as a “tacit admission of securities fraud”, given Milton’s concurrent declarations about the fully-functioning nature of Nikola’s vehicles.
It will now go through the SEC and the courts in a lengthy process, but there are a few things to say.
Firstly, writing for a company where I cannot invest in anything we recommend, at least not for a while after, it does strike me as very odd that American investor regulations allow for a company to take a huge short position in a stock and then publish a wildly aggressive hit piece on it.
However, this is normal practice, and so Milton’s attempts to decry this as foul, selfish play is meaningless. Those are simply the rules of the game. While yes, it is a bad system, it does not mean that because someone is making money from it is not proof that they are wrong.
Hindenburg’s claims range from Nikola overstating its capabilities to outsourcing pretty much all of its business, from battery technology to manufacturing. It also describes Milton’s sketchy history of overstating his company’s technology and capabilities.
Mostly, these things seem to be unequivocally true.
It was already clear that Nikola’s valuation had far exceeded sound reason.
Even at $30-$40 per share, it’s being valued as a ten-billion-dollar business, with zero sales and no production facilities of its own.
And even if everything Hindenburg said about Nikola was true… so what?
Its basic claim is that Trevor has a dodgy history and that Milton has been overstating Nikola’s proprietary tech and potential.
We’re a minimum of 3-5 years away from being able to judge the company as a fully-fledged truck company.
And in other sectors there are plenty of companies which are as much about the brand as they are about the product.
Hence the success of Aldi, which dispenses with the popular brands, and through brilliant logistics is able to offer most products at much lower prices.
Or hayfever pills – branded ones cost £5-£10 but non-branded ones, which are exactly the same pill, are 99p. Which is mental.
So there is no reason why Nikola cannot be the company which designed a load of trucks and built a brand and then leases those things to GM, Iveco and Bosch to manufacture. That is a completely reasonable business model.
What I’m saying is, you don’t have to pick a side. You don’t have to say I believe everything Milton says, or cheer on Hindenburg.
Instead, as James and I will do, you can say yes, the company is and has always been a very aggressive marketer and is using big claims to gather investment. But it has got investment now and will be working with major global companies to deliver on its promises.
Either way, it’ll be a fascinating company to follow, whether you like it or not.
All the best for now,
Editor, UK Uncensored
PS Hydrogen isn’t the only next-generation technology getting investors interested. 5G is a key theme for all investors at the moment, and just as Nikola, it’s dividing opinions and creating fierce debates.
I’m no expert, but my colleague has been taking a closer look at this exciting new investment.