Nikola: Vaporware Selling For ~$25 Billion
Summary
NKLA's reverse merger has me and I'm sure many other investors, scratching our heads.
This company is not Tesla. Trevor Milton (contrary to his own beliefs) is not Elon Musk. And I do not believe they are truly worth as much as Ford.
There are so many problems with this story it's tough to know where to even begin. The only thing I like about NKLA at this point is their product designs.
Management's contradictory statements, lack of clear vision, lack of any business model whatsoever, ridiculous lawsuits, and trading mechanics in general make me a long-term bear. This is not the next Tesla.
Initiating coverage with a sell rating. No PT.
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Introduction
Nikola Motors (NASDAQ: NKLA) is an automotive company that plans on selling and/or leasing mass market hydrogen semi trucks, as well as electric pickups, and off-road vehicles. The company is based in Utah, and has gained more public attention after their reverse merger with VectoIQ, a special purpose acquisition company turned them into a public company. In essence, Nikola is a BEV+FCEV (battery electric vehicle and fuel cell vehicle) auto company. Nikola's business generated ~$150,000 in revenue in 2019, and $88 million in operating losses. Revenue is unlikely to scale up at Nikola until some time in 2021, if they execute according to plan, when they plan on mass producing their vehicles. Only two sell-side analysts cover the stock, with one of them forecasting a mere $83 million in revenue in 2021. Considering the run-up and hype surrounding the stock, I pose the following question:
Why Would You Buy Nikola?
Over the past few days, I have asked myself time and time again this same question. What are the reasons for contemplating a long position in Nikola? Here is the best list of reasons I could come up with for being long Nikola on a fundamental basis.
futuristic product designs
unique approach to tackling environmentally-conscious transportation
list of large potential customers (Anheuser Busch for example)
This is about all I could fundamentally like about Nikola. In this article, not only will I address these three points and understand why they are wrong/irrelevant, I will also provide reasoning for why the bear case on this stock is so compelling.
Futuristic Product Designs
Before I go in-depth as to my skepticism of Nikola's business, I would like to point out one of the rare positives with this company that I can find. I love, and I mean absolutely love the product designs. Here is the (arguably) most consumer facing product Nikola offers: The Nikola Badger pickup truck.
(source: Nikola)
It looks awesome and has a great name. And then there is one of Nikola's Semi truck offerings, the Nikola One (this is a FCEV):
(source: Nikola)
The designs look futuristic and sleek, yet practical and grounded at the same time. So, I've got to give Nikola's design team praise for what they have come up with here. The only problem is design versus implementation. The auto industry is notorious for putting on a good show, and showing the world the "future" of automotive technology at some big event. Only then a few years later, as the vehicle is being produced, the production vehicle is far different from the concept. Designing a compelling vehicle is difficult, but mass producing a functional, working vehicle that looks just like the original design is exponentially more difficult. That is why one needs to take these futuristic looking designs with a grain of salt.
Unique Strategy
Another component of the bull case on Nikola is the companies dual strategy, focusing on both FCEVs and BEVs. This is interesting, as Nikola is positively exposed to both of these technologies depending on which one ends up succeeding down the road. If hydrogen based products succeed in the long run, then Nikola has exposure. If battery based products succeed, then Nikola still has exposure. So, its essentially a win-win. The problem here is, execution of this strategy as well as propriety. At this point, Nikola has talked a good talk on this dual strategy, but will they be able to walk the walk as well? And what is proprietary about their batteries or hydrogen fuel cell technology that makes them stand out from the competition. Essentially, Nikola is saying they have a breakthrough battery technology, that no one else on the market has, that enables a large performance gap between them and the rest of the competition. Battery experts dismiss this as preposterous. So really, Nikola likely lags the competition in terms of battery efficiency. And even if these claims are accurate, who is going to produce these batteries? The process of scaling up battery cell production en masse is not easy whatsoever. Essentially, I'm saying take Nikola's battery tech "breakthrough" with a large grain of salt.
Hydrogen Fuel Cell Stations
In order for Nikola to be successful in the FCEV vehicle market, they are going to need some way for their trucks to refuel. Similar to how Tesla (NASDAQ: TSLA) built out its Supercharger network to accommodate a growing fleet of EVs, Nikola will need to build out a hydrogen refueling network and likely a BEV recharging network too if they're trying to attack both markets. While Nikola has begun building out this network, this is going to be a capital intensive endeavor, and will likely require additional dilution/debt issuance in the future to fund. Who is to say that public investors will be interested in funding them at that point in the future?
Tesla Lawsuit
One of the reasons it is hard for me to lend any real credibility to Nikola is their $2 billion lawsuit against Tesla. The first time I had even ever heard of Nikola was when they filed a lawsuit against Tesla for the design of the Tesla Semi. It appears that this lawsuit is stalling out, and it makes me question: Why is management using investor money to fight a lawsuit that is (in my view) highly unlikely to get the desired result? The Nikola One and the Tesla Semi look very distinguishable in my opinion, so to use investor money on a lawsuit that lacks fruit doesn't make sense to me strategically. Shouldn't management invest in technology that will create a performance gap between Nikola and competitors?
(source: Trucks.com)
$10B In Preorders... With A Caveat
Nikola has claimed in the past they have more than $10 billion dollars worth of revenue in preorder backlog for their semi truck (~14K trucks). That's great, except there is a caveat. I was able to go on the Nikola Motors website and reserve one of the these semi trucks for free. Now however, the reservation book is closed. So real question is how "sticky" are these orders. How many of these reservations are actually going to be converted to revenue? There is no upfront purchase commitment or contract or even just a deposit for their Semi truck offerings. As a matter of fact, there is nowhere on the site where you can purchase the semi. They only appear to be offering leases. However, to give credit to Nikola where credit is due, they have implemented a reservation system for their Nikola Badger pickup truck ($5K refundable deposit). Now that they have done that, the question is how much demand can they generate for their product that is now likely to be very sticky. But to take Nikola's $14 billion preorder number at face value isn't too smart, as this $10 billion is very unlikely to translate 1:1 in sales.
As of right now, Nikola likes to promote regarding Anheuser-Busch, Amazon (NASDAQ: AMZN), Coca-Cola (NYSE: KO), and more, but they don't have any real purchase commitments with Nikola. Sure Anheuser-Busch is supposed to buy "up to 800" of these trucks. It's on Nikola to deliver.
Mass Producing What Has Never Been Mass Produced
The next component of the bear case on Nikola is execution. One of the most difficult things about being a Tesla bull for years was the production struggles the company had to meet demand. Not only is demand in question for Nikola, they will face some of the same production struggles that Tesla faced when they were ramping the production of their various vehicles. The only way that Nikola can avoid these problems is through outsourcing, which is costly, but could work out. The problem is, management has not given us any clarity on what their general strategy is.
Are they going to be a vertically integrated manufacturing firm, or are they going to nail the designs, and outsource the manufacturing? We just don't know, as management has made contradictory statements as too whether or not they plan on being vertically integrated. If they do plan on being vertically integrated, then that is troublesome as it means Nikola will have to endure the same types of supply chain and production struggles that Tesla endured when they ramped up their own vehicle lineup.
Capital Intensive
The auto business, whether it be vertically integrated or outsourced, is a very capital intensive business. Nikola is not done raising capital, not even close. They will likely need money to build out their charging/fueling network, Arizona factory, etc. The auto business is capital intensive, as we very well learned from Tesla over the last few years. Will the Street fall in love with Nikola like they did with Tesla? In my opinion, not yet. Investors were willing to fund Tesla for years because they already had some level of execution. At the time of Tesla's IPO, the company was already selling the first generation Tesla Roadster, building out their Supercharger and service center network, and were beginning work on the Model S. Keep in mind, Tesla did all this at a valuation of ~$2 billion. Right now Nikola is valued at $25 billion and it's heaviest capital deployment days are likely ahead of them.
Trevor Milton Isn't Even The CEO Anymore
A lot of my critique of Nikola has to do with their founder Trevor Milton. While a lot of the great American success stories of our time (Steve Jobs, Mark Zuckerberg, etc.) were college dropouts, so was Elizabeth Holmes, someone who was supposed to be the next Steve Jobs. Trevor Milton is a college dropout and has run three companies, Nikola included. Initially he ran a failed eCommerce startup during the tech bubble. Then he ran a natural gas company that he sold to a metal manufacturer later. So, he's way into renewable energy and clean transportation but ran a natural gas company?
Notably, he's not the CEO anymore. He essentially handed off the role to Mark Russell, an old colleague at the company that acquired one of Milton's old companies. So Trevor Milton, with this great vision, is so devoted to the company he just took public, that he let somebody with no experience in the auto industry whatsoever lead a company with nothing but some futuristic product designs. Is that supposed to make me bullish? And what industry experience does anybody in the Nikola C-Suite bring? That's a genuine question. A team of ~300 employees that created a cool looking product but have no clear go-to-market strategy are being given a $25 billion valuation. How does that make sense?
Utilizing Dealership Model
This isn't as big of a point, but what dealerships? Tesla has already proven that vertical integration in the supply chain can work in the auto industry. I don't see what strategic advantage outsourcing their distribution model gives Nikola. And what dealerships/service centers has Nikola done a deal with? This is the only thing I could find, and this only going on in Tennessee and Mississippi. They don't have a dealership model at the scale they need to service and sell the vehicles they are trying to produce. They need to ramp this very fast in tandem with the scaling of production.
Playing The Catchup Game in Battery Tech
Considering the fact that legitimate battery experts (as I mentioned earlier) have not taken Nikola's battery claims seriously, how exactly does Nikola plan on catching up to competing auto OEMs in terms of battery efficiency? Particularly Tesla and Hyundai. Nikola is most likely, going to be playing a game of catch up in battery efficiency.
Autonomy Strategy
Anybody who understands autonomous driving and its implications for the overall auto industry, and trucking specifically, understands that trucking will be one of the first industries to be automated. What is Nikola's autonomy strategy for when autonomy is eventually powerful enough to automate routes. Because Tesla has Autopilot. To me, the company's autonomous strategy is unclear.
Weird Statements
Now, let's talk about all of the weird/contradictory statements Trevor Milton has made. The majority of the claims Milton has made are in these two interview on YouTube linked here and here. He's said a lot of things in interviews that I just wanted to break down.
First statement:
Tesla's just following in our footsteps.
This is probably the statement that baffles me the most. Tesla, a company that has successfully assembled over one million vehicles since inception, is just following in the footsteps of a company that is yet to assemble even 1,000. If I were Trevor Milton, I wouldn't speak so soon. I would wait until they have proven a technological lead or at least begun mass producing a product rather than attacking companies that have already been successful.
There's very few people that can out Elon in this world and I'm one of them.
This is somewhat of a follow-up statement that Milton makes in his interview with JMac Investing on YouTube. Musk has pioneered space travel, digital payments (via PayPal (NASDAQ: PYPL)), and electric vehicles. Trevor Milton is a college dropout who ran a semi-successful eCommerce startup during the tech bubble, and sold a natural gas company before starting Nikola. I do not mean to offend Mr. Milton, but I don't understand how he can make such claims.
I want to contrast these next two quotes to show what I was talking about earlier with regards to management's inconsistency on their vertical integration strategy.
The difference between Nikola and everybody else is that we provide the entire supply chain. So that means not just the truck but everything with it: the truck, the fuel, the service, the warranty, and the maintenance. Very similar to how Amazon (NASDAQ: AMZN) controls the whole supply chain.
and
So we decide 'I'm gonna do a different business model I'm gonna partner with everybody. I'm not gonna do anything myself, I'm gonna partner with everybody.' So now we've partnered with the biggest people in the world actually help us.
This is very basic material that you should know early on in the creation of your business model. It isn't something that you should be consistently changing on the fly. This is something you need to know years before your IPO. That's another thing: the CEO, sorry, executive chairman himself says that their business model is always changing:
Our business model has been evolving. It's crazy, you know people don't realize how many times-a-month we have to sit down with our business model and look at it and reevaluate how you actually do this and everyone does it.
There's an old saying: a goal without a plan is just a wish. It seems Nikola's plan is always changing, and that goal of dominating the world and becoming the next Amazon is nothing more than an elusive wish. They need to get disciplined and do a review of exactly what their business plan is. Nikola lacks focus.
Then there is this:
Our burn rate is actually really low, only a couple million dollars per month burn rate.
In fairness to Mr. Milton, he might have just misspoken, because if you look at Nikola's burn rate in 2019, it actually equate $7.2 million per month, not the "couple million" he said.
About the one thing he might have in common with Elon Musk is his disdain for short-sellers. He is pretty vocal on Twitter (NYSE: TWTR) about his frustration with bears. One example of this, was his attack on ARK Invest, a research firm that is not even short Nikola.
(source: Twitter)
And there's this:
(source: Twitter)
I just find it comical that somebody who is so busy trying to launch a product that has never been produced at scale before is so laser-focused on non-issues like short-sellers. How about this Mr. Milton? Stop worrying about short-sellers and execute on your business model. Hey, it worked for Elon Musk.
Not only is Trevor Milton bashing the shorts and propagandists he is promoting articles that promote his stock.
(source: Twitter)
I suppose this is fine, I've just never seen a high-level executive take such a vocal interest in the price of his stock and his skeptics, Elon Musk included. But hey, at least Shaq O'Neal loves the Badger right?
One could argue that Mr. Milton isn't even the CEO of the company, so shouldn't I just focus on the CEO? I agree, the CEO is very important. Mark Russell is the new CEO of the company, and I question his strategic direction considering his lack of experience in the automotive industry. Even then, Trevor Milton seems to be the head salesman for the entire company, and the stock in particular. For that reason, he is likely the best representation of management's vision.
Valuation
So now, think about all of the things I just told you about this company and consider the fact that it is valued at $25 billion, roughly the same valuation as Ford (NYSE:F). A company with no revenue, no real business model, an alleged battery breakthrough that experts deem is not plausible, and not strategy is being valued at $25 billion. Does that make any sense? Look, I understand that its 2020 and common sense has been mostly thrown out the window, but this is pretty crazy.
Options & Trading Technicalities
And I'm not the only one saying these things. As a matter of fact, Wall Street agrees with me on this one. Just look at the LEAPS from a few days ago.
January 2022 calls at a $65 strike price were trading for $12.26.
January 2022 puts at a $65 strike price were trading for $46.60.
Options traders don't buy it. And then you combine this with excruciatingly high cost to borrow rates, and you can see just how desperate people are to get short this name.
As Edward Vranic details in an excellent article here, there are upcoming catalysts that will greatly increase the availability of shares and the overall float, which will likely lead to a drastic gap downwards in the stock. Then you combine that with the warrants being activated on July 3rd, and there are a number of negative trading catalysts that very well could sink the stock drastically.
Risks To My Bear Thesis
To be clear, being short has its risks. Fundamentally, Nikola could gain solid access to capital markets that enables continued funding of their operations for years to come. I see their ability to access funding as much more constrained, but I view it as a possibility.
And maybe, just maybe, Nikola's battery breakthrough could be legitimate. If so, Nikola would have a solid technological lead over competitors, Tesla included. Again, I regard this as unlikely, but this is a real possibility.
And finally, all it takes is one positive catalyst for the stock to launch a complete and utter short squeeze. With borrow rates at ridiculously high levels, and desperation to be short Nikola at high levels, one positive turn on the fundamental side could unleash a large short squeeze, propelling the stock higher.
Another risk to being short is the business model. Nikola might actually have something going for them. If they can execute on this model, at scale, then I could conceivably change my mind on the stock.
(source: Nikola)
Conclusion
Yes I'm short Nikola (via options). I don't have a propagandist intent or anything like what Trevor Milton is saying. People being sucked into the vision of Nikola being the next best thing since the Tesla IPO are doomed to lose money in my opinion. For this reason, I believe a short position is warranted until the structural problems at Nikola are addressed. At the end of the day, Nikola is selling an idea right now. They don't have a product that they have proven they can mass produce, so essentially, it's vaporware. But it's selling at a $25 billion valuation.
TIPRANKS: SELL
Disclosure: I am/we are short NKLA via puts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This is not financial advice. I am not a financial advisor. Please do your own due diligence before initiating a position in any of the securities mentioned. None of my remarks about the corporation and/or management are meant to be insulting, just constructive criticism. More disclosures…
MangoTree Analysis has a tech-centric focus on advertising, autonomous vehicles, semiconductors, and software primarily. This article first appeared in Seeking Alpha.