Nikola (NKLA) Deep Dive: Exciting Comeback Story?

Dive into Nikola to understand how a company that is widely considered a scam can still be worth billions, and whether it has the potential to be a massive comeback story.

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Backstory: Nikola from 2020 to today

It's the middle of 2020. About four months ago, an invisible threat swept the world triggering widespread social isolation, business closures, and a mad dash to stock up as much toilet paper as possible. Little did we know at the time but we were all just starting to enter a new normal of social distancing, masked faces, and mass vaccinations that'll last for much much longer than the original "two weeks" touted by public officials.

It's been months since the lockdowns started and you're isolating at home just like seemingly almost everyone else in the country. You're sitting on the toilet bowl looking at your phone, with Robinhood open, and you notice in the corner of your eye a stock you've never seen before. The ticker was NKLA and its up 82.5% today. What the heck is going on?!

This was probably not too far off from how most people were introduced to Nikola. A small startup, turned SPAC, turned public company aiming to build hydrogen EV vehicles with a name suspiciously related to another high-flying EV company we all know and love, Tesla. Put together, the two company names form Nikola Tesla, the name of the famed genius inventor most known for designing the alternating-current (AC) system used by almost all electricity grids since their introduction.

Nikola seemed to be Tesla's ambitious little brother. It even had a bombastic and charismatic founder and CEO that loved to make the rounds on social media, just like Tesla.

But Nikola was really only a fledgling startup. It had zero revenue. All its products were just concepts. How could it be worth more than Ford?! Also, what the heck is a SPAC?

In the succeeding months, Nikola would mint partnership after partnership (even one with GM!), and its CEO Trevor Milton would be all over the airwaves talking up his company. Nikola was going to usher in a new hydrogen economy to supplant fossil fuels, and it appeared unstoppable.

That is, until one humdrum Thursday morning in September when a shortseller report alleging that Nikola had been lying to the public about its capabilities was released and swiftly took over financial headlines and social media chatter. This started a spectacular crash and prolonged bear market for the stock. From over $50 then to around $10 now.

Oh, and along the way, Milton would step down, the SEC and DOJ would investigate the company and Milton, the latter would be indicted, and Nikola would be fined $125 million.

All in all, this was a sh💩t show.

Almost overnight, Nikola went from a seemingly unstoppable hydrogen EV company to being written off as a scam. However, despite a precipitous fall in stock price, Nikola is still worth about 4 billion dollars today. How can a "fraudulent" company still be worth multiple billions of dollars after so long? This article explains.

One of the Most Hated Stocks?

After the shortseller report came out, Nikola quickly became one of the most hated stocks on the market. Bitter stock holders, angry Tesla investors, and bemused bystanders all piled on to disparage the falling stock, ailing company, and disgraced founder and CEO.

On YouTube, you'd see videos titled:

"How to Lie Your Way to $34 Billion [Nikola Motors Fraud]" with 1.7 million views

"The Dumpster Fire Fraud of Nikola Motors [$34 Billion Scam]" with 97k views

"The Nikola Trevor Milton Scandal Just Got Worse..." with 61k views

On Reddit, you'd see posts and comments like:

"How tf was nikola able to succesfully pull their scam for so long?"

"Nikola is completely Fucked. Trevor Milton and his merry band of retards are finished"

Even after delivering their first EV truck to Total Transportation Solutions this December, people are still commenting:

"Easy to have zero emissions when you have zero product!"

"This is literally the only company/stock I hope dies. Also, Milton is the most epic business bitch of the past decade. Fuck Nikola."

"Who the F is still buying NKLA these days, it is the ultimate sh*tco going to zero"

Nikola was completely written off as a scam and it'd become a laughingstock. It was just too easy to bash the company. To add insult to injury, but not surprisingly, GM swiftly pulled out of its highly publicized deal with Nikola, wanting nothing to do with the now tarnished and controversial company.

Excuse me for the crassness but Nikola at this point was clearly in deep sh💩t. However, opportunistic contrarian investors might wonder whether it's too soon to write the company off. Given the overwhelmingly negative sentiment, if Nikola was able to surprise the market by selling electric trucks at volume, it could pull off an AMD or GME-esque turnaround that would be a windfall for any investors brave enough to catch the falling knife.

Read on to dive into the company and find out whether this is a possible thesis.

Why Is Nikola Still Worth Billions?

To explore this contrarian investment thesis, we should begin with the actual state of the company when the shortseller report hit, and what its response was.

When Nikola merged with the blank check SPAC company VTIQ in June 2020 to debut on the market as NKLA, it was infused with over $700 million in cash. This is a huge amount of capital for a start-up. Thus when the shortseller report came out in September, Nikola was flush with cash and was just starting to deploy this new found capital. According to its Q4 2020 earnings report, the company ended the year with $840 million in cash and zero debt.

So cash isn't a problem.

It was also engaged in a hodge-podge of different projects that were from Milton's undisciplined machinations, including a highly publicized hydrogen fuel cell pickup truck called the Badger that GM was supposed to help build, a hydrogen fuel cell garbage truck, a hydrogen fuel cell jet ski, and a hydrogen fuel cell off-road military buggy. This was in addition to its core product portfolio of the battery and fuel cell powered versions of the Nikola Tre and the fuel cell powered Nikola Two class 8 semi-trucks.

Milton managed the company in the same bombastic style he used for his numerous public appearances.

Post-shortseller report, Milton was ousted and company president Mark Russell and CFO Kim Brady were given more significant roles in the company, with Russell being appointed the new CEO. Russell and Brady would become the much more humble and disciplined faces of a post-Milton Nikola.

Both executives are highly experienced professionals. Russell has been building and managing companies in the manufacturing industry for over 20 years, with his most recent post prior to Nikola at Worthington Industries as president and COO. Brady, on the other hand, has a financial background with 20 years of experience in investment banking, private equity, and corporate restructuring. Prior to Nikola, He was a Senior Managing Director at SOLIC Capital.

Not surprisingly, Russell and Brady immediately got to work trimming Nikola's ambitions and focusing the entire company on validating and producing the Nikola Tre BEV (battery electric vehicle) and FCEV (fuel cell electric vehicle) as well as developing hydrogen fueling infrastructure. Although $840 million is a lot of cash, it was not enough to bring two semi-trucks to market and build hydrogen fueling infrastructure at the same time, so Brady also had to raise money.

Here's a timeline on the company's execution on this much more reined in but still ambitious roadmap:

Side note: Nikola partnered with IVECO, a European vehicle manufacturing company, to produce the Nikola Tre. The Tre is built on IVECO's S-Way frame while Nikola installs the electric engines, power source (battery or fuel cell), e-axle, in-vehicle infotainment system, and other systems needed for a modern electric truck.

Nikola's Coolidge manufacturing facility on January 14th, 2021 (Bear's Workshop)

Nikola's Coolidge manufacturing facility on May 16th, 2021 (Bear's Workshop)

Nikola's Coolidge manufacturing facility on July 15th, 2021 (Bear's Workshop)

• December 7th, 2020: the first phase of the Coolidge, Arizona manufacturing facility just started. Nikola predicts trial production "to begin in the late second quarter or early third quarter of 2021".

• December 7th, 2020: the first Tre BEV prototype arrives at the Port of Baltimore from the Nikola/IVECO industrial complex in Ulm, Germany. Nikola will start testing these prototypes within the month.

• December 29th, 2020: the first steel column for the Coolidge manufacturing facility goes up.

• February 12th, 2021: by now, Nikola has multiple Tre BEV prototypes being subjected to extensive testing, including winter driving testing.

• May 25th, 2021: the Nikola/IVECO industrial complex in Ulm is on track to be ready for the trial production of Tre BEVs by June.

• June 14th, 2021: Nikola secures a $300 million "equity line-of-credit" from Tumin Capital. This allows Nikola to issue and sell stock to Tumin Capital at a 3% discount from market rate, at any time, up to $300 million.

• June 17th, 2021: the first phase of the Coolidge manufacturing facility is complete. This is a major milestone in the construction of the facility.

• September 15th, 2021: the Nikola/IVECO industrial complex in Ulm is inaugurated and unveiled to the public. This first phase of the facility can produce approximately 1,000 Tres per year.

• September 15th, 2021: Nikola and IVECO sign a Memorandum of Understanding (MoU) to deliver 25 Tre BEVs to the Port of Hamburg from the Ulm manufacturing facility.

• September 27th, 2021: Nikola secures another $300 million equity line-of-credit from Tumin Capital, resulting in a total equity line-of-credit of $600 million.

• October 7th, 2021: Nikola partners with Canadian natural gas pipeline giant TC Energy to jointly design, build and operate high-volume hydrogen production facilities over the next five years.

• October 14th, 2021: PGT Trucking signs a Letter of Intent (LOI) to lease 100 Tre FCEVs from Nikola following "the satisfactory completion of a Nikola Tre FCEV demonstration program under terms to be agreed to between the parties". Nikola is expected to start fulfilling this LOI in 2023 when the Tre FCEVs are productionized and Coolidge is ready to produce them.

• October 29th, 2021: Nikola tweets the fifth Tre FCEV alpha adorned with a pink breast cancer ribbon paint job. This shows that Nikola has already made significant progress assembling and testing Tre FCEVs. As the same time, they are just about to productionize and produce the Tre BEV.

• December 10th, 2021: a highly respected and YouTube-famous automotive engineer Sandy Munro released the last video in a five-part series where he visits and documents his trip to the Coolidge manufacturing facility. He had mostly positive things to say about what Nikola has accomplished, and was particular impressed with the quality of the alpha Tre FCEVs. This led many to accuse Munro of selling out to Nikola, which he strongly denied with proof.

• December 18th, 2021: Nikola completes its first two customer deliveries of trucks to the Port of Los Angeles (two Tre BEVs). They will be operated by Total Transportation Services (TTS). The two Tres are part of a four-truck pilot of two BEVs and two FCEVs. If the four Tres pass the trial period, TTS is expected to purchase 30 BEVs in 2022 and 70 FCEVs in 2023.

• December 21st, 2021: Nikola agrees to pay a $125 million fine to the SEC in five installments over the next two years. This concludes the SEC's investigation into the company that started out as fallout from the shortseller report released last year. With the end of this investigation, Nikola closes an unfortunate (or maybe fortunate, since Milton was replaced) chapter of the company's history.

• December 22nd, 2021: Heniff Transportation signs an LOI to order 100 Tres from Nikola. Similar to Nikola's arrangement with TTS, Nikola will deliver 10 Tres initially for trial. If satisfied, Heniff will complete the rest of the order.

It's evident that Nikola has been executing aggressively this past year on its plan to build and sell Tre BEVs and FCEVs. It completed the first phases of both manufacturing facilities in Coolidge, Arizona and Ulm, Germany, extensively tested the Tre BEV and just started testing the Tre FCEV, secured customer orders for both types of Tres, and (not mentioned in the timeline) partnered with several truck dealerships for sales and service coverage acrosss the United States (Quinn Company, Alta Equipment Group, RIG360, and a melange of smaller dealerships).

For a company that is widely considered a scam with zero viable products, Nikola is certainly working hard to prove the critics wrong. It'll enter 2022 with significant momentum to continue building out its manufacturing facilities, sell Tre BEVs, continue testing Tre FCEVs, and work on hydrogen fueling infrastructure.

If one is curious about Nikola's progress in building the Coolidge manufacturing facility, I highly recommend the Bear's Workshop YouTube channel which has weekly drone videos of the construction site since construction began. If one prefers videos with higher production value, check out Nikola's own Driving Change series on YouTube which details the company's general progress in constructing both the Coolidge and Ulm facilities, as well as its progress testing and building Tre BEVs and FCEVs.

Market Sentiment Often Lags Company Execution

Nikola's progress in 2021 is nothing short of extraordinary. From flat ground in Coolidge to a massive manufacturing facility by mid-year, with Tre BEVs and FCEVs rolling off the assembly line by year-end. In Ulm, the transformation is less dramatic but similar and equally significant. At the start of the year, Nikola had zero sales and service presence across the United States. Now they have almost coast-to-coast coverage. Despite a tarnished brand mired in controversy, the team was able to secure truck orders from several customers and even start fulfilling them (starting with TTS for the Port of Los Angeles).

With Kim Brady at the financial helm, the company has also managed its cash well, consistently burning less cash than analyst expectations each quarter. The securing of a $600 million equity line-of-credit from Tumin Capital was also a noteworthy and crucial achievement in 2021.

When you look at what the company has done, and watch interviews with its executives and employees, you get the sense that the entire company is fully focused on executing and proving the naysayers wrong.

It's very hard to bet against a well-capitalized and indignantly determined company working on a highly innovative and planet-saving mission.

This is why despite a significant fall from its 2020 peak of $34 billion in market cap, the company is still valued at $4 billion. If you read social media comments, you'd think the company is levitating at this valuation with zero viable products. But it's generally true that inelastic market sentiment often diverges from company execution, and in the case of a highly emotionally stock like NKLA, sentiment seriously lags behind. A company can execute way faster than the emotional convictions of a market with high retail participation.

The Future of Nikola and Hydrogen Fuel Cells

Nikola appears to be executing well on its short term plans but what about the long term prospects of its business model (fuel cell powered electric trucks)?

There are many reasons to be bullish on the long term. First of all, with political pressure ramping up to green-ify America and Europe's infrastructures, there will be significant demand for trucking companies to transition their predominantly fossil fuel powered fleet to an electric powered fleet. In the US, there are 4 million Class 8 trucks in operation as of 2020 (from the American Trucking Association) while in Europe, that number is around 6.2 million as of 2021 (from the European Automobile Manufacturers’ Association). In total, more than 10 million fossil fuel trucks need to be replaced in the US and Europe.

Pressure to transition to electric trucks won't just come politically, there will also be significant organic demand to do so since electric trucks are just better products in general. Electric trucks have better performance characteristics, are easier to operate, and easier to maintain.

Finally, a quick word on hydrogen fuel cells. Hydrogen fuel cells are a much better green energy alternative to fossil fuels than batteries. This is true for several reasons. First, refueling a hydrogen fuel cell truck is almost just as fast as refueling a diesel truck, while lithium-ion batteries take a long time to charge. Second, hydrogen is significantly more energy dense than both diesel and lithium-ion batteries (120 MJ/kg for hydrogen, 45.5 MJ/kilogram for diesel, and 0.936 MJ/kilogram for Tesla batteries (source 1, source 2). For long-haul trucking, a higher energy density is extremely important for lower costs. Finally, Nikola expects the cost of hydrogen to fall significantly with the help of government subsidies such that it'd be highly competitive with diesel.

Put together, it's looking like Nikola will not only be a short term comeback story, but also a long term success.

Fin

I find it bewildering how much market sentiment has diverged from Nikola's rate of execution and current state. The majority of market commentators still consider the company a scam with zero viable products. The reality couldn't be further from this assessment. Nikola has production facilities in both the US and Europe, and is productionizing a battery powered Class 8 semi-truck ahead of Tesla. It'll will also be one of the first, if not the first, company to productionize a fuel cell powered Class 8 semi-truck next year.

I said this above but I'll say it again:

It's very hard to bet against a well-capitalized and indignantly determined company working on a highly innovative and planet-saving mission.

This is why Nikola is still worth billions.