On Tuesday morning, battery- and hydrogen-electric vehicle maker Nikola Corp. (NKLA, Financial) disclosed that automotive company General Motors (GM, Financial) entered into a subscription agreement on Thursday to purchase $2 billion worth of its common stock, or 47.7 million shares.
According to the agreement, which was filed with the Securities and Exchange Commission on Thursday, the purchase price of each share was set at $41.93, which was 16.1% above Thursday's closing price of $36.13.
In addition to the equity investment, which gives GM a stake of approximately 11% in the electric truck maker, GM will partner with Nikola in a "potential game changing" arrangement in which it will produce Nikola's Badger, a marquee hydrogen fuel cell electric pickup truck for the consumer market, by the end of 2022. GM will also supply the fuel cells for Nikola's class 7/8 truck globally (except in Europe).
Following the news, Nikola's shares spiked more than 40% to $50.05 throughout the day's trading, while shares of GM were up more than 7% to trade around $32.38.
The deal appears to be an all-around win for both the companies and their shareholders, as it shows promise to leverage the companies' strengths while helping to cover weak points.
On the one hand, Nikola does not expect to produce any revenue until at least 2021, which is a major tie-up for potential investors, as the company will keep burning cash until it can secure a reliable income stream. Having an original equipment manufacturer partnership with GM will help increase financial stability and soften the blow of production costs.
On the other hand, GM has been under pressure from Wall Street to spin off its electric vehicle unit in order to better compete with pure-play EV companies for investor money and other sources of much-needed funding. The deal with Nikola could give GM the media buzz it needs to keep its EV operations under its umbrella.
"When we look at the opportunity to continue to leverage our technology — the Ultium battery platform system as well as the Hydrotec fuel cell technology — this is a wonderful validation of our technology, and then bringing our engineering and manufacturing expertise to the table," GM CEO Mary Barra said in an interview on CNBC's "Squawk Box."
With both companies set to benefit greatly from the deal, is there opportunity in the stocks for investors? Let's take a look.
Growth opportunities and stronger foundations
Phoenix-based Nikola, which specializes in electric and hydrogen-powered semi-trucks, went public on June 4 via a special purpose acquisition company deal with VectoIQ. Its share price jumped to nearly $80 following its entry into the public markets before dropping closer to the $40 to $50 range for the next couple of months, showing the high price tag that a company offering "vehicles of the future" can command.
One of the biggest stumbling blocks Nikola faces, in terms of both operations and stock price, is the lack of profitability, which it expects to persist for at least the next year. The partnership with GM offers Nikola an easier path forward in terms of both production lines and engineering, potentially speeding up the timeline to profitability for the electric truck specialist – if not in terms of vehicle production dates, then at least in terms of how much time it has to spend in the red due to high costs.
"GM was very unique to us because they brought a lot more than just building the Badger," Nikola CEO Trevor Milton said about the deal. "It's a perfect relationship. They're one of the best purchasers, manufacturers, engineering houses in the entire planet."
GM also anticipates opportunities from the deal to increase as Nikola grows and unveils new vehicles to the markets. The potential benefits also include an unlocking of value for GM's electric vehicle unit, which Wall Street has consistently opined as being undervalued by investors (thus the push for spinning it off).
GM has "decades of supplier and manufacturing knowledge, validated and tested production-ready EV propulsion, world-class engineering and investor confidence," Milton commented. "Most importantly, General Motors has a vested interest to see Nikola succeed," he added, likely referring to the common stock purchase as well as the income from producing Nikola's vehicles.
Valuations
It is impossible to get an accurate grasp on the value of a stock when the company behind it has yet to report even a full quarter as a publicly traded company. However, with the cash from going public via SPAC, as well as the deal it has secured with GM, it seems likely that Nikola's foundations could remain solid compared to other EV players, especially if it can roll out more innovative hydrogen-powered trucks in the coming years and capture a decent share of the consumer market with its Badger pickup.
The endorsement from GM, which has decades of experience in the production and sale of automobiles, seems to be a positive indicator of long-term value, placing a price tag of at least $41.93 on the stock (i.e., what it is paying for its own shares of Nikola).
As of Sept. 8, GM trades at a price-earnings ratio of 31.16, which is higher than 60.58% of competitors and surpasses the company's own 10-year median price-earnings ratio of 7.58. According to earnings estimates from Morningstar, GM has a forward price-earnings ratio of 7.56. However, one thing to consider is that GM is a more mature company, with a revenue growth rate of 0.1% per year and an Ebitda growth rate of 2.9% per year over the past three years. Thus, even a significant boost to earnings might not incite significant market euphoria or overvaluation.
One thing to keep an eye on in regard to Nikola (and now, by extension, GM) is the shareholder culture. GM's purchase of Nikola's common stock is a foundational component of the partnership between the two companies and gives GM a vested interest in Nikola's stock price, which in and of itself is a good thing as it gives both companies a stronger incentive to help make the partnership profitable.
On the other hand, Nikola's CEO seems to take the company's stock price quite personally. Taking to Twitter (TWTR) following the initial rise and fall of the stock price in June, Milton wrote:
"Don't listen to fear mongers. Don't follow if you are not in this for the long run. I have more to lose than anyone so I will lead with honesty and integrity. The shorters hate you because they can't control you, the regular guy! Be long if you like Nikola or don't follow us."
This kind of inflammatory language attempts to play on people's emotions by identifying a "bad guy" to "defeat" by buying the stock and classifying those who sell or short the stock as enemies of progress. Famous value investors like Warren Buffett (Trades, Portfolio), Peter Lynch and many others attribute their success at least in part to not falling victim to their emotions while investing, so those interested in Nikola's stock may want to ensure they are focusing only on the long-term prospects of the company itself rather than on a constructed narrative.
While a higher stock price may help with publicity, it also serves another purpose: increasing the company's ability to raise more funds in the future via additional common stock offerings. Raising additional funding is a double-edged sword, and if Nikola's management becomes more desperate to keep the stock price going up, it could be a sign of impending struggles.
Conclusion
Nikola and GM are set to begin a partnership that could strengthen the foundations and growth prospects of both companies, potentially providing an opportunity for investors to hop on board before the deal begins to bring about real positive results.
In addition to keeping an eye on synergies from the deal as the two companies begin to work together, investors may also find it helpful to pay attention to the stock prices of both companies, any new stock issuances or debt offerings that may come up and whether they are focusing more on shareholder value or on ra
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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