After months of turmoil, Nikola stock fell 25% on Monday following a revised General Motors deal, which eliminated any equity stake claim.
Nikola Motors (NASDAQ: NKLA) is a zero-emissions vehicle concept company that IPO’d on June 4th and it has been a bit of a rollercoaster ride since then. The stock boomed for most of June buoyed by the Tesla-generated hype for electric vehicle companies. Then August saw its first quarterly report as a public company with revenue of just $36,000 generated from solar installations. Things began to look up in September when it managed to secure a blockbuster $2 billion equity deal with General Motors (NYSE: GM) which would’ve allowed the company to build its long-awaited pickup truck.
Only a few days later and fraud allegations were declared featuring an old and misleading video forcing Nikola to reveal the fact that it does not even have one working truck in operation. Naturally, GM tabled the deal for the time being whilst the allegations were considered. In the meantime, the Founder/CEO, Trevor Milton stepped down and Nikola posted an earnings call with $0 in revenue.
By the end of November, the deal is back on the table but is heavily revised, resulting in its stock falling 25% on Monday. So what does this mean for the beleaguered motor company in the long term and should investors buy Nikola stock?
What does the revised deal mean?
In the previous deal, Nikola was to receive hydrogen batteries, chassis architecture, fuel-cell systems, and a factory allowing it to build its Badger pickup truck. In return, GM would receive an 11% stake and $700 million.
The new agreement is non-binding, will expire at the end of 2021, and is subject to revision for definitive terms. What has been announced for now is a sole focus on the fuel-cell side of the business, with GM providing Nikola with hydrotec fuel-cell systems for its commercial semi-trucks. Nikola has stated that it is hopeful that a deal can be signed further down the line to help develop hydrogen refueling stations.
Essentially, the revised deal means that Nikola has now lost the support to build its proposed pickup truck, and whilst GM is supplying the hydrogen fuel-cell side of its business, it does not want to be bogged down with an equity stake, particularly whilst the investigations of fraud are still ongoing.
Should I buy Nikola stock?
This is a great question that a couple of months ago would have been a resounding no. However, with its stock falling 25% on Monday, this could present a buying opportunity for the most risk-hardy investors. The company is still worth around $8 million, which is a full $1.5 million more than what Harley-Davidson is worth.
Additionally, The fact that Nikola can no longer be distracted by its proposed Badger pickup could present a move in the right direction as it now only needs to focus on one aspect of business moving forward. There is no doubt that hydrogen fuel-cell cars will become a viable power alternative down the line, but for now, some serious logistical issues are surrounding the whole industry that simply can’t be overcome by a beleaguered company such as Nikola.
When looking at the bear case there are several serious factors. Apart from the fact that the Badger pickup will no longer be built, Nikola’s founder stepped down as CEO and has left the company, shares are currently down 78% from its peak, and its recent earnings report showed $0 in revenue. Investors in this company should also be aware that as of the 1st of December the insider lock-up period has ended, which could seriously damage the company should Founder Trevor Milton decide to sell his 91.6 million shares.
This stock is not one that an investor should consider buying. Until the company produces tangible evidence that it is actually producing vehicles and it can contribute meaningfully to the Hydrogen fuel-cell industry, investors should stay away from this stock.
Are there better alternatives?
One alternative that is making waves is NIO (NYSE: NIO), colloquially known as the Chinese Tesla, which despite the pandemic has managed to increase its vehicle sales in Q3 by 146.1% year-over-year (YoY). NIO saw a 146.4% increase in its total revenues YoY to $666.6 million, whilst the stock has soared this year at 1,309% at its peak in late November.
This company might not be selling as fast or as largescale as Tesla, but in comparison to Nikola, they are at least getting vehicles out the door and they are growing at a pace that should pique any investor’s interest.
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