Why Nikola Stock Popped

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Bill Barker about the latest headlines from the markets. They talk about how a major exercise bike manufacturer is planning to expand its reach, a big new deal in the electric vehicle space, dividend cuts and much more.

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This video was recorded on Sept. 8, 2020.

Chris Hill: It's Tuesday, September 8th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Bill Barker. Good to see you my friend.

Bill Barker: Good to be back.

Hill: Transportation is the theme of today's show. We're going to talk about GM's deal and the ripple effects from that, but we're going to start with cycling, or at least a form of cycling, that is. Shares of Peloton up 10% this morning. The exercise equipment maker announced a couple of changes to its menu of offerings. They're cutting the price of their core exercise bike by more than 20%. They are also adding a more expensive version of the bike. They're also going to be adding a less expensive version of the treadmill.

I don't own Peloton but I totally understand why the stock is up. I think, if you're a Peloton shareholder, this is what you want to see. You want to see them, among other things, broadening the number of things that they offer people.

Barker: Yeah, they're becoming more affordable, gives them more of a reach, especially if they can price the core bike competitively and then get the subscription revenue added on top of that. So, it's largely good news. They still have a very expensive -- you know, on the bikes, they're taking that down, but the treadmill is still above $4,000, which I don't think is -- first of all, they don't have the same, sort of, brand association with treadmills that they do with the stationary bikes. And I think that they have plans to get that treadmill down sometime next year, a very substantial cut in the price of that, down to, sort of, $2,500, but they have all the business they can handle at the moment and that is what you want to hear from a company.

Hill: Another thing you want to hear if you're a Peloton customer or a shareholder is the comments that John Foley, the CEO, made about the delays that they've had in terms of deliveries that they are working to cut those down. I think they want to see even more improvement in that area, but it's moving in the right direction at least.

Barker: Yeah, you don't want to hear that a company has more business than it can handle or that it cannot handle the business that it has, so getting everything right-sized is a challenge and, you know, one they couldn't really have prepared for going into this year, the surge in demand, so I don't think that management suffers by still having some of these delays, as long as they're showing improvement as they go along.

Hill: I'm going to take a slightly opposite point from what you just said. I do think, particularly for younger companies, there is some cachet to, "Boy! we can't keep these things in stock." I think that, you know, earlier this year that was a good narrative for Peloton, both for the business and for the stock, but there is this invisible line that you don't want to cross. You want there to be demand, you want there to be slightly more business than you can keep up with. If it starts to be too much, that people say, "Oh, wait a minute, it's going to be how long until I get this thing? Oh, I actually need something sooner than that, I'm going to take my business elsewhere." So, I think that worked for Peloton earlier this year. I think the comments that Foley made are, [laughs] fortunately for the business and the stock, are the right comments.

Barker: Well, it's a better narrative than what we started the year with, which was, as you may recall, aren't you going to apologize for your Christmas commercials? And I may have taken the position, if we talked about Peloton, that there was no such thing as bad publicity. And if I did, you may have challenged that and said, "Yes, there is such a thing as bad publicity." And you're the guy with a communications degree, so you probably know where the truth lies in that one. But there is certainly, I don't know, you know, [laughs] whether they look back on any of that controversy which did create lots of attention around the product and around the company, and regret ever making the commercial at all or not, but I think they mostly don't have to think about it today.

Hill: No, they don't. And it's not on the same level as Netflix and Qwikster, but if Peloton continues to put up the numbers they are putting up, continues to broaden the portfolio of offerings, then it gets further and further in the rearview mirror, but let's talk about the stock ...

Barker: You're a competitive runner, hold on a second I want to find out about this treadmill, what do you think? I don't know if you have a treadmill, you kind of like running outside like all normal people. Now, I've offended some. But [laughs] does a $4,300 treadmill strike you as, yeah, I'd never spend that for a treadmill or like, well, if it's got all the bells and whistles that I can imagine being on it that might be a thing I would buy?

Hill: I would not spend that amount of money on a treadmill, but I'm not a good judge of that sort of thing, because, you know, Peloton could call me up and say, look, don't tell anyone we're huge fans of MarketFoolery and we know there's a gift ban at your corporation, but we're just going to ignore that and we're just going to send you this thing for free. And I would say, "That's so nice of you, no, thank you." I'm not someone [laughs] who enjoys running on a treadmill, it's sort of a last resort for me if that happens. So, I'm not a good judge of that. Again, to go back to what it means for the business, I think it's a smart move.

Barker: Are you sending out hints as to what presents you will accept? Historically, it has been booze and coffee.

Hill: I mean, you know, let's not put booze and coffee in the same category as exercise equipment; that's literally at the other end of the spectrum. The stock of the day is Nikola Corporation; shares of the electric truck maker up more than 35% after announcing a partnership with General Motors. GM is taking an 11% stake in Nikola and it's going to produce their marquee hydrogen fuel cell electric pickup truck by the end of 2022, which seems a very long way off. But today everything is sunshine and rainbows both for Nikola and for General Motors; that stock is up somewhere close to 10% as well.

Barker: Yeah, the market is saying it's a win-win. You know, General Motors has to be involved in what the future of this business is going to be. They have most of their weight in the past iteration of what transportation looks like and still is going to look like in the very near term, but the future is far more electric than it is today and GM has really not escaped the trading range that its stock has been in for the last decade more or less, and why should it, it's got an enormous number of very expensive assets which are valuable assets to have when they're all being put to use, they had to be shut down for portion of this year. And I think that given the balance sheet and everything it's a good opportunity for them to move these efforts into a joint venture rather than to completely try to do them themselves, where I think they come into the difficulty of their employee contracts and the union obligations and the pension obligations to all their labor force. So, Nikola is not operating under that type of model, that type of history, that type of obligation, they're freer to do the things that I think GM wants to be pointing to.

Hill: Yeah, I understand the enthusiasm on both sides, but to your point, I think long-term, at least at this point, it's hard to look at General Motors and think, oh, this is a stock I'm going to put on my watchlist right now, I think it's a smart move by Mary Barra and her team, but you know, once you get past the initial details of this partnership, I think a logical [laughs] question for GM is, well, wait a minute, aren't you also producing your own version of an electric pickup truck? And they are. And so, that's where it sort of gets a little fuzzier in terms of where GM puts its resources.

Barker: Yeah, they're hedging their bets. They're also reasonably far along in the pursuit of autonomous vehicles and what a fleet of those might look like if they become a significant player in what may, and is very likely to be, a very significant part of the next generation of travel. So, they've got a number of bets spread around and they're growing their bets in the autonomous vehicle and electrical vehicle and really not probably capable of expanding their bet, which is enormous in terms of the, sort of, physical plant for your fossil fuel-based trucks and cars. So, I think that we know that they're going to look different over the next decade, and I think this is another indication of what it's going to look like.

Hill: I called Nikola the stock of the day, I stand by that. Another stock [laughs] making headlines for its downward trajectory is Tesla, down about 15% the last time I checked. Do you think at least a little bit of that is looking at Nikola as a stronger-than-previously-thought competitor to Tesla?

Barker: Well, the headline before this news broke, you know, Tesla was already, as a stock as opposed to as a business, because we're about to go into things which have nothing to do with the underlying business, but the fact that the S&P 500 has three new openings and Tesla did not get one of them was one of the things that some investors were maybe banking on. And by investors, bettors really, you know, I think the people whose orientation are more short-term with the stock. Because if you're a long-term investor, whether it's included in the S&P 500 is like a very, very, very small nice-to-have, not much of a have-to-have. But for very short-term investors that was a headline that was unexpected, so the stock was already weak on that.

And you know, what part of Nikola teaming up with GM might add to a little bit of selling, I couldn't really measure, because Tesla's stock is impossible to predict from day-to-day right now, except to say it'll do something fascinating tomorrow as well as today, I think, [laughs] and many of the days to come.

Hill: Right. If you bought shares of Tesla the first week of January when it was $85 and you see it today at around $360/share, that's pretty great. You know, it's rare, very rare to see a stock rise that much in that short amount of time. If you bought it last week when it was $500/share [laughs] and today it's at $360, I said this before we started recording, today is one of those days where it's a good exercise for investors to look at their portfolio, in general, but particularly if there's a stock that you own that has taken a dramatic tumble recently, today's a good day to look at that and ask yourself, why do I own this? Like, what are the reasons I had for buying this, because if there were good fundamental underlying business reasons to buy the stock, then OK, that hopefully will give you some reassurance. If you ask yourself that question and the answer you give yourself is, ah, a lot of my friends were saying you got to buy this thing, it seems like it does [laughs] nothing but go up, you know, that's probably not a great reason to buy the stock, in fact, I'll remove the word "probably," that's not a great reason to buy the stock.

Barker: Yeah, if you bought it in December, end of December, and you said, I am uber bull on this stock long-term, and I think short-term this thing could go up 100% this year, that's how bullish I am on this stock, that gets you to $170, right? That's a great year for the stock. And if the stock goes back down to $170 from here and some people are like, oh, my God, that's impossible. I would say it's not impossible, it's I don't have any dog in this fight, it's going to keep visiting briefly, at times, fascinating prices. And what price people get in or out at the moment feels more like, you know, gambling than investing for many of the people involved. I'm not saying that people haven't made an investment, both, you know, the better part of a decade ago and held onto it or this year or even at $500 they may have invested in it, but if so, I hope they were taking a 10-year horizon on that investment.

Hill: And for all the talking we've been doing about Tesla and Nikola and the move to electric vehicles and probably worth pointing out ExxonMobil yet again having a rough day [laughs] with the report by Reuters that they could be looking at a shortfall of close to $50 billion through 2021. And I say this not in jest, I say this in all seriousness, there is apparently consideration that Exxon could cut its dividend, which is, in the world of large companies that pay dividends, ExxonMobil's dividend is about as sacred a [laughs] dividend as there is out there.

Barker: Yes, historically. The market has to be considering that the dividend is not that safe, because you just don't get safe 9% yields, that's just, I think, one of the things, one of the flags that the market has by having sold the stock down to this point. And it's off about 50% this year more or less, you know, in line with other oil companies. So, yeah, I mean, the dividend is very much under pressure because they have to scale back on their spending.

Now, the spending is on expanding some of their oilfields, both shale and deep sea. And they've got the dividend, which is a major cost. Look, they still have plenty of operating cash from the business, but they do not have any this year with oil prices roughly $40 going into today, oil prices are down 8%, 9% today, so that's another bad data point for them. But they cannot make enough money on their business to cover the financial obligations that they have made for all that long; that's not to say that they have a weak balance sheet, but they can't pay the very large dividend that they pay and grow some of their operations, which don't need to be grown in the short term, and maintain the size of the staff that they have.

So, one of those is going to give, maybe more than one, the dividend; in a sense it's the easiest, it's just sort of a stroke of a pen, oh, now we will pay you less money than we used to pay you shareholders. But you've got a lot of people that are counting on that dividend. And having acquired the status of, sort of, a sacred dividend in the market, that's additional pressure to maintain it.

Hill: Bill Barker, thanks for being here.

Barker: Thanks for having me.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.