Just three months ago, car manufacturer Nikola Motors (NKLA -1.35%) was being lauded for pushing the limits of the auto industry, and its stock soared following its IPO. Then came the bad news. And more bad news. And more.

Today, the troubles have hit like a hurricane, and with every day that passes, the bricks come tumbling down faster. What caused Nikola's fall from grace? And how did it happen so fast?

The origin of it all

Nikola's current misery traces back to a September fraud allegation, in which Hindenburg Research asserted that the electric semi Nikola One truck was, in fact, an "elaborate ruse." Further, the research firm described Nikola's proprietary battery technology -- which some predicted would revolutionize the industry -- as "vaporware."

Prototype image of the Nikola Badger pickup truck

Image source: Nikola

Hindenburg Research was short Nikola stock prior to the release of the report, and Nikola claims that Hindenburg timed the release to benefit from the stock price surge after its General Motors partnership announcement. 

How valid are the accusations in the Hindenburg report? Can investors trust the short-seller's research?

Hindenburg has already benefited from the more than 30% plunge in Nikola's stock price, but investors do not have to take Hindenburg for its word along. Nikola itself issued a statement commenting on the report, and in it, the company fails to deny many of the allegations lodged against it. 

The big red flag: Nikola released a January 2018 promotional video of its 2016 hydrogen-electric powered semi-truck that makes it appear like the truck is cruising down the highway. In fact, the semi was actually rolling down a hill without power.

Hindenburg claims the semi-truck was a non-functioning prototype. Nikola, however, sidestepped the issue, explaining that the Nikola One semi was originally designed to run on its own. Then, the company scrapped the project to design a second generation of its prototype vehicle.

Nikola's non-answer sounds like a very weak excuse to investors who once saw it as the next Tesla

Then the apples came falling down

Instead of attempting to debunk the claims, Nikola claimed that Hindenburg Research had misconstrued the truth. The company's "refutation" of the short-seller's claims essentially states that:

  1. Nikola never actually said that its famous prototype used Nikola-made inverters or core components.
  2. Nikola never claimed the semi-truck in the video moved on its own.
  3. Nikola has already installed a hydrogen storage and dispensing station at its headquarters as proof that its planned hydrogen refueling network is being built.

Nevertheless, nothing in Nikola's press release seems to do much to support the assertion that Hindenburg's claims were false. Even if electric vehicle company never claimed to have a working prototype built using in-house components, many of its investors seemed to think that way and the company did not appear to be working diligently to correct any misconceptions. Investors began jumping ship after the allegations came to light.

If that wasn't bad enough, Nikola CEO Trevor Milton resigned effective Sept. 20, less than two weeks after the report was published. In addition, a reported deal between energy giant BP and Nikola has fallen apart. 

Hand knocking down dominoes

Image source: Getty Images

What happens next?

Nikola was once applauded as a revolutionary company in the auto industry. Now, there seems to be some confusion about whether it can truthfully make that claim. 

According to a Financial Times report, the Department of Justice has launched a probe into Nikola in response to Hindenburg's claims, and the Securities and Exchange Commission has also begun its own investigation.

However, at the end of September, the company's management reaffirmed their commitment to producing the 100% electric-battery Nikola Tre truck, slated for customer availability in the fourth quarter of 2021. It also aims to create a hydrogen-fueled prototype of medium- and long-haul trucks that should be ready for testing by the end of 2021.

Additionally, Nikola's newly-announced partner General Motors pledged to continue supporting the embattled automotive company. It has stated that it intends to sell its own hydrogen and battery systems to Nikola while engineering and building the company's Badger pick-up truck for the U.S. market.

Indeed, that GM plans to build its own clean-energy vehicle line may prove to be the only boon left to Nikola. Regardless of its previous murky claims, the fact that a well-established car manufacturer intends to produce a Nikola-conceptualized vehicle (albeit using GM systems, engineering, and production lines) means that the upstart could actually manage to sell a working vehicle one day.