Why Upstart Nikola Is Trolling Tesla
The EV truck startup has a $23 billion valuation — staggering for a company that generates virtually no revenue and has yet to sell anything
Every successful company produces imitators, but truly great companies are hard to copy. So the only question with a close imitator is who are they trying to fool: themselves or their investors?
In the ’80s and ’90s, there were reams of books published about how companies could be more like GE. In the late ’90s, traditional retailers tried to glom onto the internet boom: K-tel, which sold music through infomercials, spiked from $3 a share to $34 after launching a website. Books-a-Million did even better, rising from $3 to $50.
Today, the world’s most famous, if not eccentric, CEO is Elon Musk, whose electric car company, Tesla, is the second most valuable automaker in the world. Inevitably, there’s an imitator — Nikola Motor, the Phoenix-based EV truck startup that recently went public on June 4. In many ways, Nikola is a fledgling company: it’s been in business since 2014, has announced several trucks and automobile products but not sold any yet, and generated $58,000 in revenue last quarter from installing solar panels, a business it expects to discontinue — a fact that should strike Tesla followers as particularly amusing given Elon Musk’s own pivot into electric vehicles by way of SolarCity.
Nikola is a darker story, about a CEO who uses the same tools, and abuses investors’ tendency to pattern-match, in order to build a business whose primary function is selling stock.
But Nikola is a big company in two senses: Its CEO, Trevor Milton, makes bold proclamations and promises (sound familiar?), and the firm sports a $23 billion market value, just 7% less than Ford’s, a staggering valuation for a company that generates virtually no revenue and has yet to sell anything. And while Milton is betting big that the company’s hydrogen-electric semi trailers will drive its core business (pre-orders represent nearly $10 billion in potential revenue), the founder has unabashedly come out saying he hopes that his consumer-facing Nikola Badger pickup will directly compete with America’s best-selling truck since 1981: the Ford F-150.
Tesla is a story about how a CEO can ride the hype wave to build a real company that — while often criticized by investors — does manage to sell a game-changing product. Nikola is a darker story, about a CEO who uses the same tools, and abuses investors’ tendency to pattern-match, in order to build a business whose primary function is selling stock.
Return of the blank-check company?
If it looks like Nikola came out of nowhere, that’s because it basically did. Nikola went public a few weeks ago with much less fanfare than the average company that IPOs, by merging with a special-purpose acquisition company (SPAC). SPACs, also known as blank-check companies, are essentially shell companies that turn the IPO process on its head: Instead of starting with a business and raising money to grow it, SPACs raise money up front, and then find an existing company to acquire for cash or stock. This is similar to the process of a reverse merger. Typically, when a SPAC announces a deal, investors have the option to either redeem their stock at its original value or accept shares of the newly created company. SPACs typically have a finite life during which they need to either find an acquisition target or return their cash.
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SPACs have come in and out of fashion. They’ve existed since the ’90s, and there are even earlier antecedents. They’re popular with investors because of the redemption option, which protects downside: Invest at $10 per share, wait for the deal announcement, and you get to choose whether you want to own stock in the new company or you’d prefer your $10 back. But management’s incentives are tricky: They make more money if they find a deal shareholders like, but that gives them an incentive to find a good-looking deal rather than one that produces long-term value. The time limit also makes them reluctant to wait.
Investor and early Facebook strategist Chamath Palihapitya is a fierce advocate for SPACs, seeing them as an alternative to IPOs. In an IPO, banks and companies negotiate a price, and the banks a) have a better sense of the real market value of the business, and b) will be doing a lot of business with the buyers and not so much with the seller. Invariably, IPOs involve a “pop” — the price rises, sometimes significantly, enriching the buyers at the expense of the company. In a SPAC deal, the pop happens after the offering, so it tends to reward loyal shareholders instead. Palihapitya has put his money where his mouth is, organizing three SPAC deals (one of which merged into Virgin Galactic and turned into a popular stock for day traders).
Nikola agreed to merge with VectoIQ into a SPAC in March, at a valuation of $3.3 billion, or $10 per share. The stock briefly rose almost 50%, then settled down to just under $11. But Nikola caught a second wind in May, rising over $30 by mid-month. And a few days after the merger closed, in early June, it rocketed to almost $94 per share. Last Friday, it closed at $63.55 (as of this writing), but was still trading at multiples of its valuation from just a few months ago.
The future of long-haul trucking
Nikola has the potential to put a big dent in the $796 billion trucking industry. It has a lot of products in its pipeline: an electric semi-tractor-trailer truck with a sleeping compartment. A hydrogen-powered tractor-trailer. A military-grade off-highway truck. And the aforementioned Nikola Badger, a hydrogen-electric pickup truck that will begin to take pre-orders June 29, which the company hopes will rival the nation’s most beloved pickup truck — the Ford F-150. The F-150 sells 800,000–900,000 units per year, and Nikola plans to put a $60,000 price tag on theirs, implying that they want to hit a revenue run-rate of around $51 billion annually from this vehicle alone.
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The company’s roster of announced products should be eerily familiar to any Tesla-watcher: There are promises of revolutionary new vehicles, bold long-term projections — and short-term milestones that may or may not represent a meaningful commitment. Their CEO, Milton, has a hyperactive Twitter presence, tweeting nearly 20 times a day (Musk manages a more sedate eight tweets-a-day pace. Then again, he’s CEO of two companies). Milton’s tweets range from product teases (“Wonder what’s below the design studio lights.”) and renderings of new vehicles to giveaways and lunches with randomly-selected Twitter followers. It’s a surreal blend of tweets à la Elon Musk and tweets from Bitcoin scam accounts pretending to be Elon Musk.
Their CEO, Trevor Milton, has a hyperactive Twitter presence, tweeting nearly 20 times a day (Musk manages a more sedate eight tweets-a-day pace. Then again, he’s CEO of two companies).
Nikola has already invested a lot on R&D, and they’ve broken ground on production and manufacturing facilities in Germany and Arizona. It’s not a fake company by any means, though it’s certainly one with high self-esteem and a market cap to match. But if this EV trucking startup is truly committed to carbon-copying Elon Musk, from the product, to the vibe, to the name of its company, it should remember how many times Tesla has missed key deadlines, come close to insolvency, or been accused of serious financial malpractice. What scares short sellers away from Tesla is its CEO’s long and erratic history of pulling off crazy achievements against all odds — a difficult trait to reproduce in the best case scenario, and one that relied on more than sheer luck.
But it’s hard to be too tough on Nikola. A world with zero-emissions heavy duty trucks would be one with far less pollution and more abundant goods. Getting there requires vast sums of money that the U.S. equity market is uniquely able to provide. And a high-volatility stock sometimes functions as a sort of lottery ticket: You don’t buy it expecting to get rich, but while you own it you can at least imagine getting rich. Nikola’s existence is part of an inherently capitalist process: when a new company emerges, there’s always a question of whether it built something impossible to copy or something everyone else ought to copy. Nikola exists to answer the question: Is Elon Musk lucky? Or just really, really good?