In this episode of Industry Focus: Energy, Nick Sciple is joined by Motley Fool senior auto analyst John Rosevear to break down what's been going on with Nikola (NASDAQ:NKLA). They weigh in on the allegations put forth in the short-seller report and how the company and the management team reacted to those allegations, how this all affects the company, and what it means for the company going forward.

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This video was recorded on September 24, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. On today's episode, we will be breaking down the Nikola saga, from leading the EV SPAC [special purpose acquisition company] boom, to making a blockbuster deal with GM, to its Founder and Chairman, Trevor Milton, abruptly resigning in the face of a short-seller report that's alleged the company has misled investors. Here to help me break it all down is Motley Fool Senior Auto Analyst, John Rosevear. John, welcome back on the podcast.

John Rosevear: Thanks for having me, Nick.

Sciple: So, you heard my intro. It's been kind of a crazy story here with Nikola Motor. Just to, kind of, go back through the timeline. It was March 2nd that this SPAC deal to bring Nikola public was first announced, prior to that deal I don't think Nikola was on a lot of investors' radar. John, you're someone who follows this space, what was your perception of Nikola before the SPAC deal came out?

Rosevear: Well, I mean, we'd hear about them every now and then. There was the thing they did last year where one of their prototype trucks towed a beer trailer, and then handed it off to smaller electric delivery vans. And Anheuser-Busch made a little bit of a splash around that. So, they did have at least one truck working. So, take note of that, we'll come back to that.

But, I mean, years ago you'd hear about Trevor Milton, and it seemed almost like he was, you know, poking fun at Elon Musk a little bit, obviously, the name of the company, but also Elon's famous comment years ago about fuel cells being fool cells and impractical to use in a wide scale to commercialize in a mass way. And, you know, Trevor got a little bit of attention every now and then by saying, no, they're not, no, they're not, I'm doing it, we're doing it, they make sense for heavy trucks, we're building heavy trucks. You know, there wasn't a lot of buzz around them; every now and then you'd hear something. But, yeah, until the SPAC deal was announced with VectoIQ, which was the name of the special-purpose acquisition company, we didn't hear a whole lot about them. That's when we, kind of, all got to know them in a hurry a lot better, and what the state of their technology was, and what they had claimed, and who their partners were and so forth.

Sciple: Yeah. Let's talk about when that company came public, I mean it was a heck of a debut. So, on June 3 started trading under the ticker NKLA after that deal closed. Rocketed up to a market cap larger than Ford. What was the narrative the company was selling at that time as far as their product roadmap and how they were going to come to market?

Rosevear: The gist of it was, OK, so we have a deal, we're going to build heavy trucks in our own factory in Arizona. They were buying, sort of, partially assembled chassis from Iveco, which is a European truck maker. That's CNHI, is the ticker of its parent company, by the way. And they're going to install these electric drivetrains, and first was going to come a battery-electric truck with a range of something, like, 300- or 400 miles. And then a hydrogen fuel cell truck a year or two later with a range of more, like, 700 miles. They were going to offer them via leases. Both trucks would be leased with maintenance included. The fuel cell trucks, the lease would also include refueling at a planned network of some 700 or so stations around North America that Nikola was going to try and have built out by basically mid-decade, maybe a little later. And this was all coming. And, oh! By the way, surprise! They also had a pickup truck design and they were looking for a partner to manufacture it.

That was the story, and it was a great story, because there is clearly demand for zero-emission heavy trucks. Think of how much that would clean up if it could be done cost-effectively. And it seemed like, on paper at least, Nikola had cracked the financial code to make this attractive to fleets. And you know, he had a lot of, sort of, kick the tires kind of interest. Yeah, we'll buy two trucks and try them; that kind of thing. And it seemed like they were more or less where they wanted to be. Where they have since gotten into trouble was that, last Fall they, kind of, claimed they had a battery special sauce, you know, super-efficient battery. That seems not to have been the case. And they seem not to really have their own hydrogen fuel cell technology.

Sciple: Right. So, yeah, we'll get to the short-seller report. So, right before that short-seller report, so on September 8th, we probably got this first indication that maybe Nikola's technology wasn't as robust as they let on when they announced a deal with GM, where GM would receive a stake in Nikola, around 11%, a $2 billion nominal value, in exchange for providing services to Nikola. They would help supply fuel cell technologies as well as battery technologies. And that sent Nikola shares up 40% on the day.

John, what can you tell us about the details of that deal, and what it meant for GM and for Nikola?

Rosevear: First of all, I have to say this really clearly, because it continues to be misunderstood. GM did not invest a dime in Nikola; they did not put up any cash for this deal. What they have promised to do is develop the pickup truck into a viable product, the Nikola Badger pickup truck, using the architecture of the electric heavy pickup trucks they are developing to be the electric Chevy Silverado and GMC Sierra, there's also a Hummer coming back, which is being positioned as a GMC product, sort of, a heavy-duty high performance, high-end, off road SUV. They're going to use the bones of that project to build the Nikola Badger.

And in addition, they were going to sell batteries. GM launched earlier this year what it calls its Ultium battery system, which is a highly modular, configurable, competitive cost electric vehicle battery system. They're going to sell batteries to Nikola, which gave GM scale in the battery program. They're also going to sell fuel cells. GM has been working for several years in a joint venture with Honda to commercialize fuel cells for vehicle use. And the thought has been not so much that these would be mass produced for cars, but that they would have niche markets. GM and Honda have talked to potential military customers, truck customers and so on and so forth.

The kind of thing where you need a lot of juice, like a heavy truck, where the battery pack to give 600-, 700 miles range would be impractically heavy and would take away from that the cargo you can haul. And also, the recharging is fast because you're filling a tank of hydrogen, it's not like, you know, even fast charging. As Toyota says with their hydrogen fuel cell car, you know, it's an electric car that you can recharge at a hydrogen station in five minutes.

So, you know, there are niches for hydrogen fuel cells, and GM and Honda have been working toward a commercial product that could fill those niches. You know, being able to sell some to Nikola was great from GM's perspective. Hey, we'll get more scale on this program, we have a customer, etc., etc. So, it all looked good for GM, and they were getting, what was it, a 10% or 11% stake, of course, they were getting it at about $41/share, if I remember correctly. And the stock is not near that at the moment.

But for GM, GM said, yeah, we've checked out Nikola. Yeah, we'll do this for them. What some of us said right on that spot was, wait a minute, I thought Nikola had its own tech, why are they buying GM stuff? On the other hand, you know, GM is obviously a real business with real stuff coming in. [laughs] So, they would at least have good batteries and good fuel cells and so forth to start with, even if they were, you know, didn't really have their own tech or were tinkering with it or whatever. But it raised a few questions.

And then, of course -- I think it was three days later -- the Hindenburg report dropped.

Sciple: Yeah, exactly, John. Yeah, I want to move on to that now. I had shared that opinion when GM announced that deal, you know, from one perspective it makes sense, you partner with this manufacturer with a lot of scale and some experience in some of this technology, maybe it reduces your costs. But then the question is, where is Nikola's, where's the ware there, where is their technology that they own that makes them special versus someone that's just putting together technology from other companies? And that leads into the short-seller report on September 10th, Hindenburg Research released a report calling Nikola "an intricate fraud," and outlining, what it said, were instances of the company misrepresenting its technology and progress toward developing its trucks.

John, obviously, this is almost a 70-page long report, but what were the high-level allegations in this report and what was Nikola's response to those?

Rosevear: To way oversimplify the report, it's basically, everything Nikola showed us before the end of 2017 or so was bogus, was smoke-and-mirrors. That there are some trivial things, like, they covered up the label on a part that was used on a prototype, an inverter. You know, they were planning to make their own, they bought one for a demo. That kind of thing is no big deal when you're a start-up and you're scrambling, but there were some more serious things. Their original prototype, the Nikola One, which is this big white semi-truck that was said to be fully functional, was not actually fully functional. Now, that was back in 2016 that they showed that. They have since shown trucks that are fully functional.

But the problem here, from Nikola's perspective, is they didn't come out right away swinging. The report sat there for a couple of days; people digested it. Trevor Milton said some things on Twitter that were not especially helpful. And so, it really got its grip on the market and the stock went down and it has been still going down. It was down last I looked today, so.

Sciple: Yeah. So, last I checked, and you know this is a very volatile stock, so subject to change, but the shares were down about 50% since the short-seller report. There's also been reports that the SEC and the Department of Justice have also opened some inquiries in response. The big thing for me is when you saw Nikola's response, it was very clearly drafted by counsel. And were not any direct refutations of any of the allegations; in particular, the big one that a lot of folks have talked about this idea that Nikola, in order to show that their truck was operational, rolled it downhill versus actually having a working engine and powertrain in the vehicle.

And then I think what piles on top of this, as we were talking about before we started recording, is that very soon thereafter you have this initial response from Trevor Milton, the Founder and Chairman of Nikola, saying we're going to refute all these allegations one-by-one and cowards run. And then, on Monday, September 21st, Trevor Milton resigned. And then the very next day he deleted his Twitter account without any announcement. This is someone who had been very, very, very active on Twitter in responding to shareholders and responding to some of these allegations.

When you saw the response from Trevor Milton here, John, what was your reaction?

Rosevear: As we were saying before we started the podcast, we should note that Trevor's resignation came out at 2:20 AM Eastern, Monday morning. I mean, they were obviously hashing this out all weekend. And a couple days later Nikola filed a deal. Basically, Trevor agrees to pick up and go away and not say anything. And, yeah, we saw him delete his Twitter account. It has really been quite something.

The response -- my two cents take on the response when they dropped it was, OK, first of all, lawyers wrote this, as you said. Second of all, yeah, there were some smoke-and-mirrors back before 2017 or so, but not since. And besides, short-sellers are awful people. I mean, that was kind of the report and that's about [laughs] what I said on Twitter, actually; if people follow me on Twitter, I used a different word than "awful people," but that's about what it was. What it wasn't was a substantive point-by-point refutation of the Hindenburg report, which is what Trevor Nichols, Trevor Milton -- I keep wanting to call him Trevor Nikola -- Trevor Milton promised ...

Sciple: Tim Apple.

Rosevear: [laughs] ... yeah, I am. Yeah, Tim Apple. Steve Apple. Exactly. And the report went deeper and, sort of, shows that perhaps Trevor Milton was something of a smoke-and-mirror artist, shall we say; and I think it got a little personal. But again, they did not come out swinging to immediately refute it. What we heard was, Stephen Girsky, who is the former GM Vice Chairman who led the special-purpose acquisition company that took Nikola public, basically said, we stand by our due diligence. GM came out and said, yeah, we stand by our due diligence. So, you kind of wonder, who knew what, when, where, why, and how here. But as of today, Trevor is out and, you know, they're circling the wagons a little bit. The management team has been quietly talking to institutional investors saying, we're going to go on with the plan, we've got cash in the bank, we've got these partnerships, everything is ready to go. GM reaffirmed a couple of times that they would continue to work with Nikola when Nikola was ready for that.

Another partner, Robert Bosch, the big European auto supplier, said they are continuing to work with Nikola. But yesterday or the day before, we had a report that when this short-seller report dropped, they were on the verge of a deal with BP, where BP was going to build their hydrogen refueling station network. And BP basically put everything on hold when that dropped; and we don't know the state of that and we don't know the state of their talks with other potential partners, but obviously, it appears they can't do much on their own because they don't have much on their own. I mean, they have an engineering team, they have sales folks, they have some basic corporate infrastructure, but they don't have any super-secret sauce technology. One key of their business plan was that they could make hydrogen really cheaply from natural gas. Whether they can actually do that or not remains an open question, it's not something they've addressed, but the fact that they haven't addressed it is certainly suggestive.

A lot of things are up in the air right now. A Wedbush analyst came out this morning, downgraded the stock, and said there's a dark cloud hanging over Nikola right now, and until that cloud is dissipated, it's hard to know what it's worth here. And I wholeheartedly agree with that assessment. [laughs]

Sciple: I'll tell you, from my point-of-view it almost feels like, this company, that even before the short-seller report came out, when we've discussed it is, there's a lot of execution, they don't have a truck yet that's produced in volume; they've got to deliver this product for customers. And I'd say, at this point when you look at what are the assets they hold, what differentiates them? To me, it just seems as though it's kind of a bucket of money that can be allocated toward, you know, renewable electric vehicles and that sort of thing. And that money has been raised and needs to be deployed in some capacity, I think that's part of what explains why GM is sticking by this deal, because this is still capital that can go into buying products from GM.

But again, there's not going to be demand for the trucks if you don't have refueling stations. And so the question is, where are these partnerships going to come from? And I think there's a lot of pressure; you mentioned Stephen Girsky is taking over as Chairman, he is now in the leadership role here to right the ship and to prove there's something there behind the company.

What confidence do you have in these folks to right the ship and what do you view is the future of the business here?

Rosevear: Well, Girsky is a serious person, OK. [laughs] He's not, you know, I mean, somebody is like, oh, pump-and-dump game. And I'm like, no, that's not Stephen Girsky. Stephen Girsky is someone who has a very big rolodex in the auto industry and is taken seriously by, among other people, Mary Barra. This is probably why GM came in, Girsky was the Vice Chairman of GM at one point. But my take is, they have the bones of a business. I mean, they have the partnerships to build the truck. What they have is that a lot of the work has been done to get toward building the truck. They have a site for a factory, I think they've broken ground on the factory, the facility in Arizona that they're going to use to build out the heavy trucks, the semis, they have the deal with GM.

Because of that smoke, it's not entirely clear what pieces are missing; at least not to me right now. But they seem to have the bones of a business, and certainly they are not bankrupt, having just put $600 million, $700 million in the bank, they certainly have the cash to go fairly well along with this. But yeah, there's a credibility issue, and I think what has to happen is the management team that exists now without Trevor, needs to move forward enough to reestablish some credibility. And you know, I'm not sure how they'd do that.

GM standing up and saying, yeah, we're sticking with them, helps somewhat, but then everybody backs up and says, yeah, but GM doesn't actually have any cash at risk here. [laughs] You know, there's a very tiny reputational risk here. And honestly, that hit has already been taken. [laughs] And GM doesn't care a whole lot about that stuff right now anyway; I don't think Mary Barra is losing sleep over Nikola. For GM, it's a pure opportunity, pretty much. And the 10% or so stake is a bonus that might or might not pay out some day. That will, at minimum, pay for the development work, if they do it and the truck sales don't go anywhere; the pickup truck.

So, to back up and answer your question, there's the bones of the business here. A few of the critical partnerships they need, do they have all the pieces, no, I don't think so. I think BP was going to be a big piece. It may turn out that a month from now, you know, Steve Girsky and BP hash out a deal where BP feels safe preceding, and there's a profitable opportunity for them and they move forward with that. And that from that dark cloud may emerge a company that isn't valued at $30 billion or $40 billion or $50 billion or whatever, but that is a viable company working toward a market opportunity. And if nothing else, a year or two ahead of anybody who might start up right now.

Sciple: Yeah. So, John, when you say that, it reminds me of a company that we all talked about, about a year ago, that kind of was developing this new innovation, that had a very flashy founder, that had had a really high run-up in its stock price and then that founder had left overnight with a big bucket of money, leaving behind a company that maybe has a future, but we question its viability, and that was the WeWork story with Adam Neumann. In that story, a year ago, SoftBank stuck by that company, a company that collapsed from, I believe it was a $47 billion valuation down to the single digits billion. And you've got a similar thing with Nikola, where the valuation collapsed from higher than Ford, around $30 billion, to now, yeah, I think it was $6 billion this morning, who knows where it is by the end of the day. Do you think that WeWork comparison is fair?

Rosevear: Well, I didn't look really closely at WeWork, but my understanding is that there may not have been a viable, profitable, sustainable business underneath all of the joyful Adam Neumann talk. What I can tell you, knowing this space a lot better than I know the commercial real estate space, is that there's a market for, you know, green big rigs, there is a market there, there is demand for them, there are fleets who would like to be buying them now if they are cost-effective, if you can show, over the total lifetime of the vehicle, that it's not going to cost them a ton more money than a diesel rig that they've gotten serviced today.

So, whether Nikola is a very viable business or not; I mean, it has to plan to produce products, for which there is definitely a market, at the right price. I think it depends on how well they can execute in terms of cost and pricing. Certainly, getting their fuel cells from GM saves some both time and money and could perhaps lower the cost for the fuel cell trucks. You know, the batteries will be competitive. GM's Ultium batteries are expected to come in at or near the forefront of the industry when they launch next year, or whenever it is; I think it's next year. So, again, there are the bones of that. But if you're doing this all by paying partners, your own margin isn't going to be all that much at the end of the day, if you have to deliver to a price.

So, I guess what I'm saying is, there are a lot of financial moving parts. And whether this works or not remains to be seen. But there's demand for the product they want to build and they have a path to building the product, whether they can build it at a price that will satisfy the demand with other entrants, ranging from, you know, Tesla talks about it semi, but Freightliner, which is owned by Daimler, is also building electric semis and they also have some fuel cell technology, and there are a lot of other entrants eyeing this space, both, big and small. There's a company we've talked about here called Highlands, which is working to build fuel cell drivetrains or electric drivetrains of various kinds, that can be fitted into existing Class 8 semis; tractor trailer trucks. And that might be the way to do this, where companies like Freightliner and Mack and Peterbilt and so forth continue to build the big rigs, but instead of installing diesel engines from Cummins, they install hybrid natural gas-powered or fuel cell powertrains from companies like Highlands. That might be the path.

I don't know that Nikola has the best path, but again, I do know that they have, what looks on paper to be a viable plan to produce a product for which there is and will be demand, it all comes down to how well they can price it and how well -- as we've been saying about Nikola since March -- how well they can execute.

Sciple: Yeah. So, one other company I'll mention is, I believe Hyundai is starting testing on their fuel cell trucks, I believe, in the U.S. next year. And, yeah, I think the big takeaway from what you said there, John, is Nikola and I think to the extent that this bleeds over into the sector from a narrative perspective, but Nikola has gone from a company being valued on its potential how big the market could be in the future, to what it actually has right now. And I think that's partially to do or in large part to do from the shining light that the short-seller report put on the company.

We'll see where the sector goes from here, but clearly, whether from governments or businesses wanting to be more green, there's some demand to move these trucking infrastructures toward more green solutions.

Rosevear: Yep. [laughs] And there's a lot of demand. I mean, they know they have to clean up their act. We saw California wants to end sales of gasoline-powered cars, there's regulations coming like this for trucks and they're coming all over the world. And the industry knows that it can't run diesel forever and they're anxious to move to the next thing, so that they can remain viable businesses that continue to make good profits moving goods. You know, trucking is a service we need until we invent something better, so somebody has got to do this, somebody has to enter this business, by mid-decade somebody has to be selling these trucks.

There are a few people, a few companies, both established players and new entrants like Tesla -- Tesla isn't really new, but they would be a new entrant in heavy trucks -- angling for a piece of this market, which everybody seems to be forming by 2025 or so. Nikola could be among the first-movers, if they can pull up their bootstraps and get moving here again, but we don't know that yet.

Sciple: Yeah, we shall see. I think this is a really difficult PR hurdle to get over as an organization; not to mention the execution risk. I think about, like, an athlete when there's drama going on in the press, right? It's like, it's difficult enough to win a championship and then you've got all the outside things affecting you.

So, we'll be following that story, we'll be following this whole sector as it develops. And, John, we'll be excited to have you on again in the future to break it all down.

Rosevear: All right. Thanks very much, Nick.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for mixing the show. For John Rosevear, I'm Nick Sciple, thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.