The Nikola Case
02 December 2020
It is difficult to understand what is going on at the moment if you look at the evolution of the indices, and more enlightening to look in detail at a particular case.
So let's take the case of NIKOLA: the startup that wanted to replicate Tesla's example in trucks.
The name started circulating in the spring, quickly followed by an IPO. The price rose to $70, valuing the company at $26.5B.
Cowen's analyst had a price target of $80. However, the stock fell back towards $40, but at the beginning of August it was JP Morgan's analyst who advised to "accumulate" on Nikola. Finally, Deutsche Bank set a price target of $54.
On September 8, General Motors announced that it was taking an 11% stake in Nikola as part of a strategic partnership.
This is when things get complicated. On September 10, Hindenburg Research released a report questioning the Nikola file: there is no truck. The prototype seen driving in the presentation video has no engine. It was just dropped on a slope.
Following this report, the Department of Justice and the SEC opened an investigation against Nikola and its founder Trevor Milton. He resigned in the following days. The company tries to put forward some arguments but they are weak. The price is divided by two, going from $38 to $18. Note that at this level Nikola remains valued at $7 billion. GM does not move, its director - Mary Barra - ignoring the questions asked.
In the following weeks, driven by the euphoria of the markets, the share price rises to $35... Until November 30, when GM finally announces that there will be no equity transaction with Nikola (keep in mind GM's reaction time: 80 days). The share price is divided by two again and goes down to $17 at yesterday's close (capi $6.5bn).
We now have Nikola's accounts for the first 9 months of the year. They are simple:
- Sales: $0.1M
- Expenses: $235M
- Profit: - $235M
- Capex (investment): $5M
- Cash flow: $900M (from the IPO in June).
How could GM announce a partnership with a company that has to drop its truck at the top of a hill to make it run?
How could analysts give price targets on a company with such a track record and accounts?
How does the market value Nikola at $6.5 billion as of last night?
As an external investor, it seems coherent to see Nikola as an empty shell with a cash position of $900M. The company would be worth about that amount (there are few liabilities), which corresponds to a price of $2.50, or 90% lower than the current price.
This is the Nikola example. If these arguments seem coherent to you, you may understand our concern: the same analysts, managers and investors, with the same operating methods, are to be found in the rest of the market.
Have a good week,
Charles
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