Will Nikola be the next Tesla?

Nikola Corporation, a “pre-revenue” firm which plans to produce zero-emission commercial and pickup trucks, is valued as the 20th biggest automotive firm worldwide with a market capitalisation of 15 billion USD. Nikola’s large valuation places the firm above established names such as Nissan and Renault, despite founder and now former chairman, Trevor Milton, predicting that the firm will fail to generate profits in the first 3 years of operation.

Nikola’s valuation highlights the increased emphasis investors are placing on future technologies, with firms such as Tesla and Chinese electric vehicle firm NIO also seeing huge valuations due to their potential of producing the ‘vehicles of the future.’ Concerns have been raised regarding how closely Nikola’s share price reflected its true value throughout the firm’s short time being publicly listed. Financial experts believe that Nikola is benefitting from Tesla’s success in the electric vehicle field, as investors are in the search for ‘the next Tesla.’ However, Nikola has forecasted that revenues will first be generated in late 2021 at the earliest, potentially raising questions as to whether investors hurried too soon to a company still in a very early stage of development.

Nikola was founded in 2014, with a clear vision to produce zero-emission, goods transportation and utility vehicles. In April 2019, Nikola premiered plans to produce 5 emissions-free transportation products, ranging from pickup trucks to commercial trucks. The firm was valued at 3 billion USD in September 2019, during the process of raising over 1 billion USD in the series D funding, granting approximately 25% ownership to new investors and business partners – their 4th round of funding in 5 years. On 4 June 2020, Nikola merged with VectoIQ in a Special Purpose Acquisition Companies (SPAC) listing. SPAC fundraise with the sole aim of taking their ‘shell’ firm public, before subsequently merging with a ‘target’ firm, allowing the target firm to be publicly listed whilst avoiding the lengthy regulatory processes associated with the traditional IPO. Once merged, the SPAC usually gives up control over the running of the business, resulting in the ‘target’ firm managing the operations independently. Nikola was valued upon listing at 4 billion USD. The firm’s share price has been volatile, reaching an all-time high of 79.73 USD per share in early June, before falling 50% to 40.23 USD per share on 7 July 2020. A rally in share price by 53% was observed in early September 2020, immediately after the announcement of General Motors’ (GM) plans to purchase a minority stake in the firm.

GM was founded in 1908 and currently owns well-established brands such as Kia, Hyundai and Vauxhall among others. It is the third-largest auto manufacturers ranked via production size, and since 2015 has shifted focus onto expanding into areas outside of combustion engine-powered cars. GM has recently invested in ride-sharing service ‘of the future’ Lyft, as well as Autonomous vehicle firm Cruise Automation, indicating the ongoing trends to venture into new areas beyond the traditional combustion engine investments. Plans to acquire an 11% stake in Nikola were announced on 8 September 2020, in a deal that includes plans for GM to produce the Badger, a marquee electric pickup truck powered by hydrogen fuel cells, before the end of 2022. GM’s in-kind investment (a deal in which GM provide services for Nikola as opposed to a monetary investment) will be exchanged for 2 billion USD in newly issued Nikola common stock and the opportunity to nominate one board member.

News of GM aiding production caused yet another big change in the price of Nikola shares in a short period of time, with the stocks proving to be very volatile. Priced at around 34 USD per share on 4 June 2020, increased interest in Nikola and the future of products including their pickup truck – recognised as the next Ford F150 (America’s best-selling truck) by former chairman Trevor Milton, has resulted in a rapid price growth, rallying 100% to 70 USD per share by 8 June 2020.  Share price held between 60 and 70 USD throughout June, however a  July 22 announcement that Nikola would begin allowing redemption of warrants, issued in late 2018 by VectoIQ, meant that over the course of one month, 23 million extra Nikola shares were to be issued, diluting the value of current shares and prompting investors to exit the firm. Shares bounced within the 40-45 USD per share range throughout August, which was a relatively calm period in comparison to preceding the volatile few months. Investors remain concerned regarding the difference between the grandeur of Nikola’s plans and their ability to put them into place. However, Nikola’s production of the Badger and Nikola One – their flagship pickup and semi-trucks, with the range and emission output described in prototypes and designs – would lead to Nikola becoming hugely profitable in the future of road vehicles.

In the time since their SPAC listing, questions have arisen regarding the potential overvaluation of Nikola. In December 2016 – at the time founder and then chairman Trevor Milton claimed that Nikola One was ‘not a pusher.’  This means that Nikola One could drive independently as opposed to needing to be pushed onto the stage, as prototype models often do. Reports by Edward Ludlow for Bloomberg have since suggested that the model was in fact missing key components including the motor and gears, and the hydrogen fuel cell-an important unique selling point for the firm. Delays to production have also led to concerns among investors at the time of the launch of the Nikola One, as Milton projected that deliveries are due to begin in 2020. However, Nikola is now indefinite regarding a release date, with no deliveries planned to date.  Nikola’s SPAC listing has also been recognised as a red flag, with prudent investors raising concerns about the firm’s potential strategy to avoid regulatory attention as well as investors’ analysis during the Initial Public Offering stage suggesting an undesirable balance sheet. Investors were also concerned regarding Nikola’s application for a small business loan of 4 million USD from US Government during the COVID-19 pandemic. This is because Nikola, a firm backed by a 4.6 billion USD net worth chairman, Trevor Milton, with the capability to raise billions from investors in recent years, should not benefit from a relatively small amount of financial assistance in the form of government loans.

Despite investors’ concerns surrounding Nikola’s overvaluation, Nikola’s added value that arises from being first to market in the zero-emissions transportation sector, has potentially allowed for first mover benefits. If Nikola becomes synonymous with the zero-emissions haulage vehicles of the future, as Tesla arguably has become with electric consumer vehicles, the company could gain monopoly control on the future of an industry that sold 26 million units in 2019.  Announcements in 2019 of a joint venture between Nikola and European truck manufacturer, Iveco, as well as large investments from GM offers some legitimacy to Nikola’s plans.

Irregularities regarding Nikola’s practices remain indisputable, alongside the initial overvaluation of the firm. However, many investors, as well as well-established automotive firms believe in Nikola’s future potential. Similar concerns were raised in the time before Tesla produced their first vehicle, and a large portion of investors are cautious against investments in ‘pre-revenue’ firms, despite the potential benefits of creating the first emissions-free haulage vehicle. If Nikola achieves its mission to be a self-sufficient firm using autonomous production by 2028 and continues to build a hydrogen refuelling network across the U.S and across the world, Nikola will become the next generation of commercial vehicles.

 

By Daniel Regan

Senior Editor: Jo Yean Kok

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