Mary Barra is Smarter Than FinTwit

Nikola Motor (NKLA) was one of the hottest stocks in the world this summer, with extraordinary and sudden increases in the stock price accompanied by dizzying drops.  Most recently, the stock rocketed when General Motors took a stake in the company worth $2 billion and then declined when the short-seller organization Hindenburg Research issued a scathing report that all but called the company a fraud.  Hindenberg even compared Nikola to Theranos, the famous medical products company which had no products worth anything despite having attracted big-name board members and high-profile partners.

I’m still learning the electric car space so I have nothing to add to the Hindenburg research or the company’s threadbare denial. However, many investors seem to have a misconception about the General Motors deal, one easy to clean up.

General Motors did agree to receive about 11 percent of Nikola, a stake worth about $2 billion at the time.  However, General Motors did not write a check to Nikola. What it is providing as its payment for the shares is in-kind services.  And it will build certain trucks, battery packs, and fuel cell if they ever come into existence.  At its core, GM is sharing some technology, doing some development work it probably would have done anyway and sharing that, and getting several contract manufacturing deal in returns, deals which might bring as much as $2 billion of revenue and EV tax credits if everything works out correctly.

It appears to be a very low-risk deal for General Motors.  It parts with no cash up front.  If Nikola crashes into nothingness this weekend or later in the year or sometime in 2021, GM is no worse off than it was before the deal. 

Essentially, General Motors CEO Mary Barra negotiated a very low-cost call option on the growth of electric vehicles.  If everything in the Hindenburg report is true, she will have some egg on her face for picking the wrong first partner.  However, the deal does not appear to be exclusive.  There’s nothing preventing Barra from picking up the phone and calling one of the pack of other EV contenders and entering into a similar deal.  Again, a deal which if successful will help GM scale its own EV manufacturing capacity and help fund research and development.

It’s worth noting that the Hindenburg report correctly characterized the GM deal, even if they were unkind in speculating on GM’s motives. Much of the other financial press got it right too.

So if you’ve seen tweets or comments elsewhere to the effect that Barra or someone on GM’s team needs to be fired or that the company made a terrible deal, keep in mind that GM has essentially no financial downside here. 

On the other hand, if you’re depending on the General Motors deal as validation of Nikola’s business model and considering jumping into its declining stock, it may be worth some time for you to examine the General Motors deal more closely. There’s a very good case that it was an “anti-validation” of Nikola’s model.  GM is providing a lot of technology and services which investors thought Nikola already had.

Published by gregmilleranalytics

Analyzing investments in alternative sectors and offering some advice to the companies trying to succeed in them.

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