Tesla TSLA has been the main stock market headline in the electric vehicle business, becoming the most valuable car company in the world, and passing Visa to become the seventh largest US company by market cap. But almost as popular amongst EV company value news this year has been Nikola Motor, the innovative new energy truck maker founded by Trevor Milton. When Nikola and VectolIQ Acquisition Corp. closed a merger on June 3, the combined company hit nearly $29 billion in value by June 9 although more recently the high was more like $18 billion. Nevertless, it was a startup fairytale to rival Tesla’s. But then revelations by forensic financial analyst Hindenburg Research on September 10 claimed Nikola is an “intricate fraud”, and Nikola’s value started tumbling.
The Hindenburg Research allegations are extensive. The article linked above is around 15,000 words long so you might need a couple of cups of coffee handy to get through it all. However, if you do find you can’t stomach the whole thing, scrolling to near the end is recommended, because here is where you will see that Hindenburg Research has a “short position” on Nikola. This means Hindenburg has sold shares in Nikola that it plans to buy later. In other words, Hindenburg will profit from the value of Nikola shares falling because it can then buy them at a lower price to fulfil its pre-organized sale and pocket the difference.
This is a very common practice in investment circles, and lots of investors who held short positions on Tesla stock got burned when that company’s value went up but didn’t come back down as they had hoped. Elon Musk made fun of these financial losers by selling some Tesla Short Shorts on his company’s online shop. The jovial intention was very clear from the product description, which ended with the text “Enjoy exceptional comfort from the closing bell.” This was an obvious reference to the alarm on the trading floor when the day ends.
If you do manage to get some way through the Hindenburg Research article, there appears to be a lot of meat to its claims that merits further investigation. Trevor Milton has a checkered business history, at least as documented in the article. However, the truth of these allegations must always be balanced against the clear vested interests Hindenburg Research has in making them. Nikola has now retained Kirkland & Ellis LLP “to evaluate legal recourse”, and calls Hindenburg “an activist short-seller whose motivation is to manipulate the market”. Milton had promised to counter all the points made, but it’s likely that the lawyers have told him to keep quiet while they prepare the case.
After interviewing some of Nikola’s designers a few months ago, I’m confident that Nikola Motor is not a complete con. There are some aspects of a real company designing trucks. Nikola is making innovative use of VR in the design process to enable its engineers to try out materials that are not generally used in commercial vehicles and iterate interior layout more effectively. The company has experienced employees working on its products, and Milton also recently showed some pictures of one of its trucks in production. But allegations that the Nikola One hydrogen fuel cell truck in the launch video was not powered just rolling down a hill are ripe with damaging comedy potential. The YouTube comments stream is packed with jokers trying to come up with the funniest riposte. That’s not good for Nikola’s image as a serious commercial player.
If you’ve been in the tech business for a while, you’ll be filled with a tremendous sense of déjà vu. Hindenburg already made the comparison with Theranos, which is the most recent top headline company investigated for fraud by the US Securities and Exchange Commission (SEC). But the last few decades are littered with further examples of tech failure and dubious claims uncovered, such as Autonomy software, ironically named The Honest Company, and Virgin Hyperloop. At the risk of being hopelessly attacked on social media, one could mention Bitcoin’s questionable foundations and frequent multi-billion-dollar thefts in this context.
Whether Nikola Motor will take a place in this pantheon of shame is still very much up in the air. The Hindenburg Research claims seem conclusive and damning when you first read them, until you get to the end and see which way their interests lie. Now that, unsurprisingly, lawyers are involved it could be many months or even years before the complete truth comes out. But just as the online revolution had the Dotcom Bubble Burst in 2000, leaving many corporate casualties, the EV revolution has clearly now reached a point in the infamous Gartner Hype Cycle where expectations are massively inflated. Some of today’s companies will succeed like (probably) Tesla, some have already failed despite having promising products, like the original Fisker Automotive, and others are just frauds who never had what they promised. We will eventually find out if Nikola Motor is truly in the last category at some point, but even if you’re not a stockholder yourself, it’s definitely going to be fun watching the story develop.