The electric truck start up Nikola (NASDAQ:NKLA) saw its shares jump over 40% when automobile giant General Motors announced taking a $2 billion stake (11% of the company) in the company.
* Electric Vehicle
(Source: Market Insider)
Who is Nikola?
Nikola corporation was founded in 2014 by Trevor Milton. Way before the amazing success of companies like Ebay and Amazon, he launched his own e-commerce company, Upillar, which allowed customers to checkout only once with items from multiple vendors. Victim of its success – 80 million visitors per month – the company could not keep up with demand, and failed.
Right after this, Milton started dHybrid, a company that aimed to modify diesel engines to make them work with diesel and natural gas in order to reduce fuel emissions. The project also failed when they noticed than one of the main investors – they raised 100 million! – was stealing their intellectual property.
Even if it was a failed experience, dHybrid gave Milton a good comprehension of the truck industry and what it needed to move forward. dHybrid systems was acquired by Worthington Industries and eventually became Nikola Motor Company. It now had the capabilities to become one of the first companies to build zero-emission trucks.
Nikola Truck (Source: Nikola Corporation)
But now the challenge was the following: how to hire the best PhDs, with only an idea to convince them? Milton explains: “I needed people who believed anything was possible, people who did not have automotive experience to limit us by being bound to what had been done in the past. I essentially needed people equally as naïve as myself.” So, he hired young graduates and people with no experience in the automobile market.
Milton made the strategic choice of building a superior product rather than leaning on aggressive sales. They were convinced that a superior product would make for its own advertising. And it paid out. Nikola Motor Company had $10 billion in pre-order revenue without one single salesman in place. Milton and his team really made the effort of designing a completely new truck, building a whole new ecosystem, focusing on stability in freight and cutting edge technology. The only reason why the orders did not go above $10 billion is that they simply stopped accepting more.
What does the deal with General Motors mean for the company?
This is a very big deal for Nikola, which confirms its readiness for the market. General Motors (GM) will engineer, test and manufacture Nikola’s electric badger pickup. Not only with the auto giant give it its Ultium batteries – manufactured by LG Chem -, it will also provide the Hydrotec fuel cells it is developing with Honda Motor. The production is expected to begin in 2022. The same services will be delivered to help the production of the upcoming electric Class 8 trucks. The fastest way to scale might be to let someone do it for you !
Nikola Badger (source: Nikola Corporation)
In addition to their $2 billion worth of stocks issued at $41.93 per share, General Motors will have the right to nominate one person in the board. Nikola will also have to pay for the services provided by GM (parts, manufacturing, setup). Note that there is not any cash going from GM to Nikola, and that Nikola does not have to pay any cash up front.
It seems to be a great deal for both sides. Indeed, Nikola estimates it will save around $4 billion in battery and fuel cost over the 10 years deal with GM, with an additional $1 billion versus if they had to engineer, test and launch the assembly line by itself. On the other hand, GM estimates a solid $4 billion In benefits from Nikola’s payments, as well as the added manufacturing scale to its battery and fuel cell program. We should also add the potential increase in value of Nikola’s shares.
A rendering of the Nikola Badger Interior (source: Nikola Corporation)
The attractiveness of Nikola as an equity investment is most likely reflected in the stock price performance. Indeed, the stock is up +385% since the start of the year. It is also worth to keep in mind that a $17 billion market cap is a lot of money for a company which hasn't sold any truck yet (although they have $10 billion in pre-order)... In any case, the General Motors deal is a powerful confirmation of the validity of Nikola’s business model. Still, we need to see how the production will do and if promises will be delivered on time and with the required quality.
A sample of the different vehicles to be developed (source: Nikola Corporation)
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