Nikola, The Intellectual Child Of Tesla

Summary

• The most common question to my article yesterday: tell me more about Nikola.
• Nikola is the intellectual child of Tesla in every way.
• While NKLA's stock is almost certainly a bubble, there's a good possibility the bubble runs longer than any bear imagines.

Yesterday, I posted "A more worthy play on Nikola's craziness". The basics of the article were that Worthington (WOR) had made an incredible venture investment into Nikola (NASDAQ:NKLA), and that the market was ignoring the ~$1B in mark to market value that WOR had generated.

I also mentioned that I thought Nikola's stock was a bubble, and while the company would almost certainly never live up to its current valuation, bubbles can go on for a lot longer than many investors expect. Given that, I thought there was a good chance WOR would be able to exit their NKLA investment at prices approaching or perhaps exceeding today's levels.

By far the most common question I got in response to the article was for more on my views on Nikola, so I figured I'd do a follow up post diving a little deeper into Nikola.

To start, it’s impossible to talk about NKLA without discussing with their intellectual father, Tesla.

I’ll admit I’ve long been a Tesla skeptic, so much so that the last time I read Smartest Guys in the Room (the Enron book), I tweeted and posted on all of the similarities between Enron and Tesla (I saw some similarities between the Match King and Tesla too). While there’s no doubt the car is great, Tesla checked roughly every box for (at best) a promote and (at worst) a fraud I’ve ever seen.

However, I haven’t simply been a Tesla skeptic because of the (many) red flags surrounding the company. I’ve also been a skeptic because high valuations tend to attract competition. With Tesla’s valuation exceeding traditional automakers magnitudes of its size (in terms of cars sold), the capital markets was screaming to investors and entrepreneurs “we want to put money into this sector. Give us something to put money into and we will fund it.” That type of valuation and invitation is going to attract competition, and when that competition comes it takes an incredible moat to fend it off. A funny thing is that the larger the valuation gets, the bigger the moat needed to fend off competition because the prize for successfully funding a competitor is so much larger. An example might demonstrate this best: if a drug is valued at $50m, in a way that’s a form of mini-moat because potential investors are going to look at that valuation and say “funding a competitor will take tens of millions of dollars in R&D; we’re not going to do that because even if we do successfully fund a competitor the potential return on our investment isn’t worth the risk.” In contrast, if the same drug is valued at $500B, every company with an R&D component is going to consider taking a shot at developing a competitor because the returns from a successful development dwarf the costs of an attempt.

Which brings me back to Tesla: while Tesla’s valuation exceeded anything I ever dreamed they’d be able to get, a key piece to a bear thesis on Tesla has always been that the capital markets would eventually fund a slew of competitors, and Tesla didn't have much of a moat to fend them off. Initially, it seemed like those competitors would be the internal electric arms of the large car companies (GM, Ford, etc.). However, with COVID rocking those legacy automakers, the market never giving them credit for their development attempts, and Tesla’s valuation continuing to scream higher, eventually the market would start funding start up competitors.

Nikola is the first of those competitors, and it’s a child of Tesla in every way. The company is attacking a mammoth markets (pickup trucks, electric semis, etc). The CEO is a hyper aggressive twitter user who makes Elon's twitter seem bland by comparison (my friend Byrne Hobbert compared NKLA's Twitter use to a “surreal blend of tweets à la Elon Musk and tweets from Bitcoin scam accounts pretending to be Elon Musk,” and I think that’s a perfect comparison). Much like Tesla, the design of NKLA's cars is undeniably cool (seriously, check their website out). Also like Tesla, the hype of the potential revenues dwarves the current financials (revenue currently rounds to roughly $0, yet by 2024 they're projecting >$3B in annual revenue from products they haven't even begun producing yet!). Even in their projections, profits remain even further out into the distance (their internal projections, shown below, still show the company burning hundreds of millions of dollars annually).

Anyway, all of this is a long winded way of saying Nikola has many, many parallels to Tesla. Short sellers and bears are all over the company, saying that they’ll never meet their promises and that the stock is overvalued in almost any scenario. Bulls will point to the mammoth opportunity and the cool products.

I (obviously) tend to fall in the former camp. But that’s what makes an investment in WOR so exciting: you’re getting access to an enormous stake in NKLA for basically free.

Most NKLA bears are going to say, “who cares? WOR will never realize value from their NKLA stock. The price will crater before WOR can sell their shares.” Maybe that’s true. But I have two responses. First, and most importantly, at today’s prices, I don’t think you’re really paying anything for the NKLA investment. Second, and almost equally as importantly, these “bubbles” can run a lot longer than people give them credit for.

Look at Tesla. It seemed like the company was collapsing when their CFO unexpectedly left, or when their new chief accounting officer left within a month of joining, or when the CEO faked the world’s largest buyout, or when insiders started tripping over themselves to sell their stock the second it vested, etc.

Or take a look at Beyond Meat. People thought the stock’s massive surge post IPO was driven by a limited float, and once the lockup period ended the stock would get crushed. While the stock did drop a little when the lockup expired late last year (going from ~$105 to ~$90), it was a far cry from the IPO price of $25/share and with the stock currently at ~$140/share it’s clear that the stock was able to handle the lock up expiration.

Bottom line here: Nikola has all the makings of “Tesla 2.0;” the CEO isn’t shy about hyping the company’s potential, and the market is willing to buy into the story. Whether that’s a bad or good thing is up to you. But this hype can drive a stock for far, far longer than many bears would expect. Skeptics seem to think WOR won’t be able to monetize their NKLA stake at anywhere close to today’s price; I’m hopeful that they will be able to, and history suggests there’s a good chance of that happenings.

Disclosure: I am/we are long WOR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.