Company / Analytics

Analytics, 09 September 2020

GM and Nikola partnership: impact on stock price

Shares of Nikola soared more than 30% in pre-market trading on Tuesday after it announced a partnership where General Motors (GM) will take an 11% stake in the electric truck maker. Shares of General Motors also rose 6% in pre-market trade on Tuesday. What are the implications of the partnership on both GM and Nikola’s stocks and future outlook?

Background

Nikola, an electric truck start-up and rival to Tesla, announced it has selected GM to be its manufacturing partner for its electric pickup truck - the Badger. The partnership will see the Badger use GM’s widely acclaimed Ultium battery systems and Hydrotec fuel cell technology.

In the deal, Nikola will exchange $2 billion in newly issued common stock for the in-kind services and access to General Motors’ global safety-tested and validated parts and components. General Motors will be subject to a staged lock-up provision beginning in one year and ending in June 2025. General Motors will engineer, homologate, validate and manufacture the Nikola Badger battery electric and fuel cell versions.

Nikola management said it expects to reduce battery and powertrain costs by $4 billion, and engineering costs by $1 billion, over the next decade.

The deal represents a key commercialization milestone for General Motors, which also announced it was broadening its partnership with Honda Motor, to include shared vehicle platforms in both electric and internal combustion designs.

“Nikola is one of the most innovative companies in the world. General Motors is one of the top engineering and manufacturing companies in the world. You couldn’t dream of a better partnership than this,” said Nikola Founder and Executive Chairman Trevor Milton.

“This strategic partnership with Nikola, an industry-leading disrupter, continues the broader deployment of General Motors’ all-new Ultium battery and Hydrotec fuel cell systems,” said General Motors CEO Mary Barra.

How did the stock move?

Shares of Nikola began an abbreviated week up to $9.22, or 25.9%, to $44.77, while those for General Motors moved up $1.50, or 5%, to $31.50. As of Friday’s (Sept. 4), market close shares of Nikola are already up 244% for the year.

Future outlook

Nikola is aiming to build battery-electric and hydrogen-electric trucks and pickups. Its long game is in zero-emission heavy-duty transportation and related infrastructure such as hydrogen station networks.

Nikola made its debut on the stock market on June 4 after it merged with special purpose vehicle company VectoIQ Acquisition Corp, a publicly-traded special purpose acquisition company headed by former vice chairman of General Motors Stephen Girsky.

Nikola’s quick leap on the NASDAQ made it a favorite for retail investors, traders, and fans, though the company is yet to generate any revenue. Nikola expects to start generating revenue by 2021 with the rollout of its Nikola Tre Class 8 BEV, followed by the Nikola Two Class 8 FCEV coming in 2023. According to founder Milton, the company will make five times the revenue per truck sold compared to other companies by vertically integrating the supply chain, just like Amazon.

Its new electric pickup truck, Badger, could become a competition of Tesla’s Cybertruck. The Badger will have an estimated range of up to 600 miles, 100 miles more than the estimated maximum range of Tesla’s Cybertruck.

Nikola and its founder are betting big that policymakers will support zero-emission technology in road transportation and that investors will see the Environmental, Social, and Governance (ESG) credentials of the company. Unlike Tesla, Nikola is not building the technology behind its vehicles in-house. Instead, it has chosen to share the intellectual property on its R&D with technology and engineering companies with deep pockets that can make Nikola’s ideas work, such as the present partnership with GM.

Going forward, Nikola will have to start generating revenues, preferably sooner rather than later, to convince the still sizable camp of skeptics that zero-emission heavy-duty vehicles could give fossil fuel-powered vehicles a run for their money over the next decade.

By pushing Nikola’s stock price today and year-to-date, investors continue to appraise zero-emission vehicle manufacturers. Delivering on targets and smooth production ramp-up could spare Nikola some of the growing pains that Tesla had two years ago.

In June, Nikola said it has over USD 10 billion in preorders from commercial clients including brewer Anheuser-Busch InBev SA. Traditional automakers have struggled to attract the same attention from investors, despite big spending in battery-powered technology.

Should you buy GM and Nikola stock, or should you wait?

According to CNN Business, “5 analysts offering 12-month price forecasts for Nikola Corporation have a median target of 46.00, with a high estimate of 79.00 and a low estimate of 45.00. The median estimate represents a -7.13% decrease from the last price of 49.53.”

“The current consensus among 5 polled investment analysts is to Hold stock in Nikola Corporation. This rating has held steady since August when it was downgraded from a Buy rating.”

According to CNN Business, “16 analysts offering 12-month price forecasts for General Motors Co have a median target of 35.50, with a high estimate of 60.00 and a low estimate of 27.00. The median estimate represents a +9.40% increase from the last price of 32.45.”

“The current consensus among 18 polled investment analysts is to Buy stock in General Motors Co. This rating has held steady since August when it was unchanged from a Buy rating.”


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