DJ Nikola's Deal With GM Is a Validation for Electric-Truck Start-up -- Barrons.com

By Al Root

Nikola and General Motors disclosed a blockbuster deal Tuesday that sent shares of both companies soaring.

Nikola stock added more to it's market capitalization than GM did, even though GM will receive an 11% stake in the start-up for no cash. That is a steep price, but Nikola got something valuable in return: validation.

There are still a lot of questions about Nikola (ticker: NKLA), such as whether the company can manufacture heavy-duty trucks successfully, hit its goals on costs, and manufacture cheap hydrogen gas to power its fuel-cell vehicles. The GM (GM) deal doesn't address hydrogen production, but it answers some of the questions about manufacturing and design.

"You honestly probably could not pick a better partnership," said Nikola founder Trevor Milton on a GM-Nikola conference cal on Tuesday. "Nikola needed manufacturing, Nikola needed supply chain and Nikola needed the history of how to build a pickup truck that would not fail."

Wall Street largely agrees with Milton's assessment. "There have been many skeptics around Nikola and its founder Trevor Milton's ambitions over the coming years, which now get thrown out the window with stalwart GM making a major strategic bet on Nikola for the next decade," wrote Wedbush analyst Dan Ives in a Tuesday research report.

"While [Nikola] still remains an execution story over the coming years in the eyes of the Street, the GM news is a paradigm changer for the company."

Ives doesn't cover GM. He rates Nikola shares at Hold and has a target of $45 for the stock price. J.P. Morgan analyst Paul Coster actually rates Nikola stock the equivalent of Buy but has the same $45 price target. Coster also think the equity dilution was worthwhile for Nikola.

"[The agreement] provides a credible path to the manufacture and sale of 50,000 light trucks [a year] in North America starting in late 2022," wrote Coster in a Wednesday research report. He also said the deal validates Nikola's strategy of powering some of its trucks with fuel cells. Other models will be powered with batteries.

What's more, the parts-supply agreement reduces Nikola's risks in terms of manufacturing and capital spending. GM will help the startup source parts effectively.

Cost savings is something Cowen analyst Jeffrey Osborne focused on as well in his research report. He is the most bullish analyst covering Nikola stock, rating shares the equivalent of Buy, with a stock-price target of $79, the highest on the Street. In addition to lower costs, Osborne called the deal a validation of the entire battery and fuel-cell marketplace.

Nikola stock jumped 41% in response to the announcement, adding about $5.5 billion to the company's market value. It was a huge move because it removed a big overhang in the stock -- namely, the question of who would manufacture the Badger, the company's light-duty pickup truck.

Shares were down 7.8% at $46.16 on Wednesday morning.

"This [deal] represents completion of the second ...of three major milestones laid out during the company's earnings call that it expected to complete by [year-end]," pointed out RBC analyst Joseph Spak in a Tuesday research report. The stock got a lift because management is doing what it said it would do.

Spak, however, is still cautious. He rates shares the equivalent of Hold, but he did take his price target from $46 to $49 a share.

The stock's jump caused another analyst to take some chips off the table. Deutsche Bank analyst Emmanuel Rosner rates Nikola stock at Hold, but on Aug. 4, he issued a " catalyst Buy" recommendation with a price target of $50, urging his clients to pick up shares before the company disclosed its financial results later that day.

The stock closed at $50.05 on Tuesday, and Rosner closed out the "catalyst Buy" call on Wednesday. Investors who followed his advice would have scored a gain of 29% from the price of about $39 in early August to Tuesday's closing level. It was a good call, although all the return was made in a single day.

Barron's wrote cautiously about Nikola in late July, when shares were about $30. That hasn't been a good call, based on Tuesday's closing price. Still, we expect shares to be volatile in coming months.

(END) Dow Jones Newswires

September 09, 2020 10:55 ET (14:55 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.