Volatility is on the market menu once again, although the major indexes’ swings are nothing compared to those performed by Nikola (NKLA) shares over the past week.
Last Tuesday’s session saw the EV truck maker’s stock post massive gains of 41% after the announcement of a partnership with General Motors. The auto giant will receive an 11% stake in Nikola and various other benefits from the deal’s structure – amounting to over $4 billion in total. Nikola, in return, will gain access to GM’s battery and fuel cell technology and infrastructure, which will go toward manufacturing its light-duty truck - the Badger – and other semi-trucks in the pipeline.
To many, Nikola’s loud market entry was so far bells and whistles and not much else, so news of the deal seemed to provide much needed credibility and validation of the upstart’s ambitions.
But hold that surge, Mr. Market. Over the next three days the gains were handed back to the market with interest. A scathing report from short seller Hindenburg Research emerged, containing allegations that Nikola is nothing more than an elaborate fraud. Following which, shares duly crashed, providing a prompt reminder how fickle sentiment on Wall Street can be. Nikola has since threatened to sue the short seller.
But back to the GM deal, of which Deutsche Bank analyst Emmanuel Rosner argues the auto industry veteran is firmly in the driving seat. Even without taking the report’s savage putdown into consideration, the analyst believes “fundamental questions remain” on whether Nikola can actually deliver on its promise.
“While GM is a strong partner, we’re not sure to what extent the deal validates Nikola’s technology or business plan. We expect renewed investor questions about Nikola’s true proprietary technology advantage, unit economics, and execution risk regarding other parts of its business plan, mainly the ability to bring down hydrogen costs... Based on our estimate that GM could make $10k profit per truck, in addition to the cost of building it, it could be challenging for NKLA to generate meaningful profits from Badger. And the large additional capex required could put pressure on FCF, and potentially require an earlier capital raise than previously anticipated,” Rosner said.
Therefore, “pending additional customer and partner validation, and early company traction with executing the business plan,” Rosner’s rating remains a Hold. Nonetheless, Rosner’s $50 price target could yield returns of 40% over the coming months. (To watch Rosner’s track record, click here)
Over the past 3 months, 4 other analysts have posted a review of Nikola’s prospect, with the results evenly split to 2 Buys and Holds, each. NKLA's Moderate Buy consensus rating is backed by a $57.67 average price target, suggesting upside of 56% could be at play in the year ahead. (See NKLA stock analysis on TipRanks)
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