Nikola Says It’s Better To Travel Than Arrive

I once dated a girl called Nikola, with a “k,” as Ross O’Carroll Kelly would say. On our first date she introduced me to one of her mates as “JFK”. Momentary confusion was allayed when she added, “….as in the airport, not the President – lots of baggage!”. Gotta giggle. Indeed, we need a few laughs this week as Dublin stares down the barrel of Level 3 pandemic restrictions on travel. Meet another Nikola. This one is a truck company and it caught our eye previously in a June column here. These were our thoughts then….

“Nikola Corp makes hydrogen and battery powered trucks. Not one truck has been produced yet, we don’t know who will make them and the company has zero revenues to date. The Nikola share price doubled on Monday and the value of the company now exceeds $33 billion. That is now $3 billion higher than the value of the 117 year old Ford Motor Company and its annual revenues of $150 billion. Punchy stuff.”

Then, earlier this month the giant GM announced a $2 billion deal involving an 11% equity stake in Nikola Corp and its assistance in manufacturing the start-up’s battery-electric and hydrogen fuel cell truck, The Badger. Roll on to this week and a little-known equity research group with an intimidating name for travellers, Hindenburg, dropped a few bombs on the $20 billion valuation of Nikola. Hindenburg alleged that a corporate video “Nikola One in Motion” was an elaborate ruse. Rather than an electric truck cruising at high speed, it is claimed that Nikola had a truck towed to the top of a hill and then simply filmed it rolling down the same hill. The research group further accused the founder and Chairman of Nikola, Trevor Milton, of a career-long record of deception and misleading partners about the existence of its proprietary technology.

Suffice to say Nikola’s share price cratered by 40% over the next few trading sessions losing $8 billion of its value. But, there are still $12 billion worth of promises left in Nikola. GM is standing by its investment but the potential for serious red faces and career car crashes for board members and senior GM executives must be high. To add fuel to investor concerns the SEC and US Department of Justice have both opened investigations into possible fraud. One wonders will the Badger ever arrive? In fact, a wider perusal of market action this week did prompt memories of that old trading adage that it’s better to travel than arrive ie trade on future promises rather than actual delivery. Our current concern is that some of our critical trading partners are giving promises way too much weight.

In the political arena about 40% of the US population have cult like faith in the “stable genius” of Donald Trump and his lawless disorder of bleach and bluster. Closer to home, Boris Johnson, 9 months after landslide-winning electoral promises, has been forced to potentially breach international law to deliver Brexit. Boris usually does better with 9 month “oven-ready” buns but, not for the first time(or 7th?), Brexiteers appear undeterred. As always, we would look to financial markets as a more reality-balanced environment with real money at stake. However, we are a little concerned as future profits/delivery appear to be growing into very very large promises…..

Check out the IPO of Snowflake this week. This company is a leader in cloud based data platforms. A hot space so the IPO was going to be hot. Sure enough, the IPO was priced at $120 per share rather than the initial guide of $85. So, that equated to a franchise valuation above $30 billion rather than the initial thinking of $20 billion. What’s another $10 billion, eh! Well…… try another $50 billion. On its first day of trading Snowflake shares traded as high as $313 per share. That’s a market capitalization of $88 billion and more than the value of 431 members of the S&P 500. Snowflake has delivered sales worth $403 million over the last 12 months. The ratio of peak first-day valuation to sales was 219 times the last year’s worth of sales. That’s a helluva lot of promises. But there’s more.

SPACs are back. Special Purpose Acquisition Companies. Often referred to as “Blank Cheque” companies, investors park funds in these IPO’s on the promise the money will be spent to acquire companies in specific sectors or themes. There is a double-whammy of risk here. One, the money is not fully spent and two, the vehicle over-spends on poor acquisitions. Year-to-date investors have parked $30 billion in these promise trucks. In pandemic-free 2019 that number was just $13 billion. One suspects many of these vehicles will, like the Badger, look good on camera but never arrive. Of course, we have written many times about the positive aspects of confidence but one must be wary of weighting the unknown future too heavily. The good news is that there will be opportunities in more boring stories. How about transport, with no hydrogen or hot air?

FedEx the logistics giant is valued at $65 billion. It delivered $69 billion of sales last year – yep, that’s a sales multiple of less than 1x compared to Snowflake on more than 200x. Yesterday, FedEx reported fiscal 1st quarter results which saw profits up 60%, volumes up 30% and sales up 13%. Sounds like they do the travelling and arriving rather well. Maybe the first Nikola got it right – weight the logistics over the personality!

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