Weekly Brief: Chasing Tesla, GM Takes Risk on EV Start-Up Nikola

Commentary By Andrew Tolve

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14th September 2020

The funding frenzy in the electric vehicle industry intensified last week as General Motors took a $2Bn, 11% equity stake in EV start-up Nikola.

Nikola burst onto the scene in 2016 with the vision of producing zero-emission big rigs. Since then it has unveiled concept semis like the Nikola One and Nikola Two and the Nikola Badger pickup truck, which is set to go into production by the end of 2022. Instead of investing cash into the start-up, GM has committed to engineer, validate and build the Nikola Badger for both the battery and fuel cell variants. As part of the deal, GM will be the exclusive supplier of fuel cells globally for all Nikola heavy duty trucks.

GM’s investment reflects a broader attitude shift across the automotive industry. Tesla’s stock has soared to record highs in 2020. As a result, Tesla is now the most valuable American carmaker of all time, leaving the old guard like Ford and GM in the dust. Tesla’s surging popularity, combined with regulatory pressure in Europe and rising EV sales for all carmakers during the pandemic, has led investors to open their wallets.

EV start-ups have facilitated the investment spree by going public through complicated reverse mergers with special purpose acquisition companies (SPACs). In a SPAC merger, a private company like Nikola takes over a so-called “blank check” public company and thus ends up as a publicly traded company that can infuse its operations with Wall Street capital. During the pandemic, reverse mergers have gained in popularity because they are easier and less time consuming than a traditional initial public offering.

Before announcing its latest partnership with GM, Nikola completed a reverse merger with a shell company called VectorIQ Acquisition. In the process, Nikola got a $3.3Bn valuation and raked in $525M in new investment. Another EV start-up, Lordstown Motors, did the same in August. The start-up took over a shell company called DiamondPeak Holdings and received a market valuation of $1.6Bn. It raised $500M in the process, including $50M from, you guessed it, GM.

The list goes on. EV start-up Fisker did a reverse merger with Spartan Energy Acquisition in July. The result was a valuation of $2.9Bn and $1Bn in gross proceeds that the start-up plans to use to launch its Ocean SUV in 2022. Two weeks ago Silicon-Valley EV battery maker QuantumScape, which is backed by Volkswagen, announced a reverse merger with Kensington Capital and landed a $3.3Bn valuation.

All of these unconventional IPOs are not without their risks. The EV segment is riddled with uncertainty. Though growing, EV sales still represent a meager 2% of all vehicle sales in the US, globally, that number rises to 17% of all sales. The trends may be pointing in their direction but investments in upstart companies like Nikola and Fisker are no sure thing. The fact that they have used SPACs to go public, thus fast-tracking their way through the traditional (and more rigorous) IPO process, only heightens the risk.

Nikola, for instance, has a dubious history riddled with allegations of unrealistic projections, falsified claims and moonshot patent-infringement lawsuits against Tesla. Nikola surged from a share price of $37.55 to $93.99 within a week of launching in June, only to crash back down to $48 by early July. The share price surged again last week after GM announced its investment but then it fell 13% on Thursday and 18% last Friday when forensic financial research firm, Hindenburg Research, published a report titled Nikola: How to Parlay an Ocean of Lies Into a Partnership With the Largest Auto OEM in America.

The report accused Nikola of filling its order book “with fluff” and documented dozens of examples of exaggeration and outright deception. In one of Nikola’s promotional videos, the truck appeared to be driving on its own… only because, according to Hiddenburg, the Nikola team allegedly dragged the truck up a hill with a tow truck and then let it coast back down.

Hiddenburg surmised that the only reason GM made the investment was out of fear of Tesla and its insurmountable lead in the EV sector. By the end of the week, Nikola stock had dropped to a share price of $32.13, well below where it started at the time of its IPO.