Nikola Corp. (NKLA, Financial) has certainly had a wild ride. After its June 4 initial public offering, the startup automaker, which designs electric trucks powered by hydrogen fuel cells, saw its stock buoyed up by widespread market euphoria in the days following its public market debut. Peaking at $93.99 per share, Nikola's market capitalization actually surpassed that of the venerable Ford Motor Co. (F, Financial) for a time.
Despite having cooled off significantly in the weeks following its IPO, Nikola's stock remained a hot topic of interest throughout the summer. The Sept. 8 announcement of a manufacturing partnership with General Motors Co. (GM, Financial) reinvigorated market attention, breathing fresh life into the high-flying stock.
Then, everything went off the rails.
Faked demo shakes faith
On Sept. 10, Hindenburg Research, an investment firm specializing in forensic financial research, released a bombshell report alleging that Nikola had faked a 2018 demonstration of Nikola One, a supposedly working prototype of its hydrogen fuel cell semi truck. According to Hindenburg's report, the prototype was anything but functional and had relied on gravity and a steep hill to give the illusion of a truck working under its own power.
Nikola fought back immediately, but its attempts to counter or discredit Hindenburg's report largely fell flat. On Sept. 17, the company owned up to faking the demonstration.
Exposure of serious lies and misrepresentations rarely helps a stock. By Sept. 11, Nikola's share price had given back all its gains following the GM partnership announcement.
Leadership shakeup does little
From the outset, Nikola CEO Trevor Milton was eager to emulate the playbook of another charismatic automotive CEO, Elon Musk. Much like Musk, Milton leveraged social media, especially Twitter, to promote Nikola's brand and establish himself as the undisputed face of his company – and of fuel cell vehicle technology.
Yet, while the spotlight can be a powerful tool in the hands of a charismatic leader, it can also leave them exposed. Milton initially denied Hindenburg's accusation, calling it a spurious attack by short-sellers and promising a robust defense of the company and the Nikola One demonstration.
As the evidence of the fake demo mounted, Milton's position became untenable. He resigned on Sept. 21 and was replaced by Mark Russell.
The change in leadership is not much of a shakeup, as Russell had joined Nikola in February 2019 as its president. Thus, while Russell was not working for the company at the time of the faked demo that triggered the current crisis, he is deeply embedded in the ecosystem that allowed it to transpire.
GM partnership in doubt
When Nikola announced its partnership with GM, many saw it as a turning point for the young fuel cell truck company. As Reuters reported on Sept. 8, the respected global automaker had agreed to provide "batteries, a chassis architecture, fuel cell systems and a factory to build the startup's proposed Nikola Badger pickup." In exchange, GM would receive 11% ownership in Nikola and board representation. With GM taking responsibility for virtually all of the operational, technological and manufacturing of the Badger, it seemed like a dream deal for Nikola.
Despite Hindenburg Research's report having focused on an entirely different vehicle, the Nikola One semi, it exposed Nikola's questionable integrity as a partner, throwing the deal into serious doubt. On Sept. 29, reports circulated that GM had delayed signing the agreement and that renegotiation was likely.
With a deal deadline set for Dec. 3, Nikola has precious little time to come to new partnership terms, while its battered reputation and shrunken share price have likely weakened its negotiating hand.
My analysis
Building auto manufacturing capacity and supporting infrastructure is time-consuming and expensive. GM had been more than willing to provide these crucial functions at a remarkably generous price, but that was before the revelations of Sept. 10 changed everything.
While newly minted CEO Mark Russell has attempted to show strength, claiming that Nikola can go it alone, commercializing the Badger and other vehicles without GM, the overwhelming majority of industry analysts doubt such a course is possible. Nikola desperately needs an established automaker to fill this role.
GM remains Nikola's best hope, but other automakers might be willing to step up. Either way, however, it will likely cost Nikola a lot more than it had initially anticipated.
Thus, I surmise that any benefits that accrue from increased investor confidence upon closing a partnership deal will likely be outweighed by much more onerous terms.
Disclosure: No positions.
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