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Why Nikola Was Never Actually A Tesla Challenger

When it listed in June, Nikola took EV-hungry markets by storm, with its shares soaring more than 100 percent within three days of trading. Now, just four months later, the company is facing a probe from the Securities and Exchange Commission, its founder has stepped down from his executive chairman post, and GM is renegotiating a deal that was all but sealed and extremely bullish for the newcomer in the automaking space.

Nikola, perhaps because of its name, was hailed by the media as a challenger to Tesla. The startup, which is betting on both battery-electric and hydrogen vehicles with a focus on the semi-truck and truck markets, first unveiled a prototype of its Badger model in 2016. At the time, it passed more or less unnoticed, but after Nikola listed, it became a focus of attention. Not all of this attention was positive.

Things started unwinding last month after short-selling firm Hindenburg Research published a scathing report calling Nikola “an intricate fraud built on dozens of lies over the course of its Founder and Executive Chairman Trevor Milton’s career.” The firm said, “We have gathered extensive evidence—including recorded phone calls, text messages, private emails, and behind-the-scenes photographs—detailing dozens of false statements by Nikola Founder Trevor Milton. We have never seen this level of deception at a public company, especially of this size.”

The report was released soon after Nikola struck the deal that could ensure its future: GM agreed to invest $2 billion in the company in exchange for a minority stake and take up the production of the battery-electric Badger. It would also provide Nikola with access to GM’s electric vehicle technology and fuel cells for its hydrogen semi-trucks. It was the kind of deal that could act as a shortcut between being an unknown startup and being a recognized carmaker. Yet now, the future of this deal is uncertain, too, because of the Hindenburg report.

Related: Oil Rallies On Stimulus Hopes Nikola tried to fight the allegations that its business is built on fraudulent statements. It claimed that the short-seller firm was acting in its own interests with the report, seeking to “provide a false impression to investors and to negatively manipulate the market in order to financially benefit short-sellers, including Hindenburg itself.”

The Department of Justice meanwhile launched an investigation into Hindenburg Research’s claims, according to unnamed sources who spoke to the Wall Street Journal a week after the Hindenburg report came out. According to the sources, the DoJ was working together with the SEC, focusing primarily on allegations that Nikola had overstated its progress on developing technology essential for its vehicles.

A few days later, the carmaker issued another statement that said founder Trevor Milton had voluntarily decided to step down as executive chairman and as a member of the board of directors. He was replaced by Steven Girsky, a former vice chairman at GM and a member of the Nikola board. Girsky was also the CEO of special purpose vehicle company VectoIQ, which merged with Nikola to take the carmaker public. To add insult to injury, allegations of sexual harassment followed for Milton.

GM acted on the report, too. It started renegotiating its deal with Nikola, reportedly asking for a bigger stake in the company, Bloomberg reported last week. The news agency cited experts as saying the renegotiation and the higher stake made sense as Nikola’s stock had plunged by close to 50 percent following the Hindenburg report and the news flurry that followed it. It regained some of the lost ground after the company reassured investors it was on track to meet its production targets, and some forecasters even see an upward potential of as much as 70 percent.

Related: Oil Majors Hit Hard By Canada's Energy Stock Selloff

Yet the Hindenburg report was not the first shadow case over Nikola’s claims and targets. In June this year, Bloomberg’s Edward Ludlow reported Milton had greatly exaggerated the capabilities of the Badger, citing people familiar with the truck who said the vehicle was inoperable and missing parts. Milton said as much, claiming some key parts were taken out for safety reasons during the showcase and that the lack of a fuel battery in the hydrogen-powered truck did not contradict anything he had said at the launch of the prototype.

But the article referred to earlier statements made by Milton, in which he claimed the Badger could drive under its own power, which, in fact, later proved to have been a false statement. And there are other problems, the Wall Street Journal noted in a recent article. Even if everything Milton has said about the Nikola trucks is true, the company, according to the WSJ’s Katherine Blunt and Charley Grant, may be leaning too heavily on cost reductions and technological advancements that may or may not materialize to make its trucks successful.

These are not easy times for the new kid on the EV and hydrogen block. Perhaps the hype around the Badger and the Nikola semis was a bit excessive and premature, but it does highlight the shifting interests of investors eager for the next Tesla. Nikola, however, will not be the next Tesla. Whatever plans Tesla has for trucks, it is now king of passenger EVs. Nikola has never staked a claim in that segment. And it has yet to prove it could be a competitor to Tesla in trucks, too. For now, there is no competition.

By Irina Slav for Oilprice.com

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