Nikola saga hits three speculative areas at once: SPACs, Robinhood traders and electric vehicles

In recent months, three story lines have captivated Wall Street: SPACs, electric vehicle companies and the rise of retail traders. The outsized success of the first two, and novice investors entering the market in record numbers, have led some investors to claim this is an indication of froth.

And one name symbolizes all three themes: Nikola Corporation.

The stock’s well-charted rise, and subsequent fall amid accusations from a short-selling firm that led to the founder and executive chairman’s resignation on Monday, begs the question over whether skeptics are right and that these three ares do indicate an overheated stock market.

The battery-electric and hydrogen-powered truck maker has attracted much fanfare since going public on June 4 through a reverse merger with special purpose acquisition company VectoIQ. The apparent success of Nikola’s debut — as evidenced by investors rushing into the stock and bidding shares higher — kicked off a wave of announcements from electric vehicle start-ups that they, too, planned to go public through mergers with special purpose acquisition companies.

A few days after Nikola began trading shares soared to an all-time high of $93.99, for a gain of more than 170%. At one point Nikola had a market capitalization above Ford’s, despite the fact that the electric vehicle maker said it would not generate revenue until 2021. The stock topped the charts on Robinhood, the trading app popular with millennial retail investors.

The company’s verbose founder and one-time executive chairman Trevor Milton frequently took to Twitter to tout both the company’s progress and promises. And there has been notable progress towards the company’s vision of transitioning away from fossil fuels: in August Nikola announced that it will provide at least 2,500 all-electric refuse trucks for Republic Services, and earlier in September GM said it was taking an 11% stake in the company, which some on the Street said validated Nikola’s business model.

But things began to unravel on Sept. 10 when short-selling firm Hindenburg Research released a report accusing the company of making false statements about its technology. The findings have, in short order, reportedly kicked off investigations from the SEC and DOJ, and led to Milton announcing on Monday that he would voluntarily step aside from the company.

Shares of Nikola plunged more than 22% during early trading on Monday, and traded around $26.40, a price not seen since May before the merger was complete.

Nikola pushed back on Hindenburg’s claims and the SEC routinely looks into companies, meaning an investigation is not necessarily a sign of wrong doing. Amid the turmoil JPMorgan reiterated its buy rating on the stock on Monday saying Nikola’s new chairman, Stephen Girsky, who is a former vice chairman of General Motors and a member of Nikola’s board, may be a “better fit for [the] execution phase.”

But the current rout of Nikola’s shares shines a spotlight on the potential dangers of SPACs and electric vehicle companies, as well as the role of retail investors in the market.

Special purpose acquisition companies are on track for a record year amid market enthusiasm for these investment vehicles, which are also known as blank-check companies since investors hand over money without knowing when, or even what for, their capital will be used.

A number of high-profile investors are leading the charge, including Pershing Square’s Bill Ackman and Starboard Value’s Jeffrey Smith. Former House Speaker Paul Ryan has also launched a SPAC, as has Oakland A’s executive Billy Beane of “Moneyball” fame.

On Friday, filings with the Securities and Exchange Commission showed that three SPACs backed by Chamath Palihapitiya are looking to raise $2 billion. 

According to SPAC Research, blank check companies have already raised more than $40 billion this year, significantly ahead of 2019’s $13.6 billion total.

The surge in SPACs comes amid heightened market volatility in the wake of the coronavirus pandemic. For the company the SPAC is targeting, it’s a way to go public on an often accelerated timeline, and without having to jump through all of the SEC’s regulatory hoops.

SPACs have traditionally had a somewhat mixed reputation on the Street since the terms can tilt in favor of the sponsor, and they can also be risky given the unknown end target.

“While we are certain that some would disagree with us, we also get a bit worried when the issuance of SPACs surge,” Tobias Levkovich, Citi’s chief U.S. equity strategist, said in a recent note. ”We fully understand the opportunistic nature of such fund raises, but we get concerned about giving people blank checks on deals that may or may not be done successfully in the future. …There is a speculative element here (even with strong sponsors and good managers),” he added.

With a new SPAC seemingly announced daily, former Trump economic adviser Gary Cohn — who himself has launched a SPAC — told CNBC that not all of them are going to “make it over the finish line.”

The attention that Nikola got when it entered the public market, which kicked off a number of other electric vehicle start-ups seeking the same route, has led to calls that there are now simply too many players.

Speculation around electric vehicle companies is nothing new, of course. Tesla is perhaps the poster child  — the company and its founder Elon Musk have fervent support on one side, with vocal doubters on the other side. While the stock has experienced some recent weakness, it’s still up more than 400% this year. Wall Street analysts frequently cite the company’s valuation as indication that it trades on emotion rather than fundamentals.

Still, on the heels of Tesla’s success this year and Nikola’s attention-attracting public debut, electric vehicle start-ups have rushed to take advantage of enthusiasm in the market. China-based Nio, which is a Tesla competitor, has seen its stock surge more than 380% this year, while shares of EV company Workhorse Group, which focuses on last mile delivery, have skyrocketed more than 900%.

To name a few of the coming EV/SPAC deals: Spartan Energy Acquisition and Fisker, DiamondPeak and Lordstown Motors, Canoo and Hennessy Capital Acquisition Corp IV, as well as Tortoise Acquisition Corp. and Hyliion.

These companies all have bold visions for what the future of mobility will look like. But it remains to be seen whether they can execute on these promises. Tesla in July posted its fourth straight quarter of profits, but it took the company a decade to reach that milestone. The company’s production and delivery issues in the past demonstrate the difficulties in bringing new vehicles and untested technology to the market.

Retail investors were among those to pile into shares of Nikola around the debut, according to data from now defunct Robintrack.

The accessibility and ease of trading apps like Robinhood have led many to speculate that wild swings in speculative stocks including Nikola, Kodak, and Virgin Galactic, among others, are fueled by novice retail investors.

Nikola’s average volume over the last 10 trading days has come in at 53.2 million shares, though it has only about 361 million shares outstanding.

Individual investors have also been said to be behind the trading frenzy that pushed the Nasdaq Composite to a record high mere months after the coronavirus pandemic sent stocks tumbling.

Japan’s SoftBank has since been identified as reportedly driving much of the action through hefty bets on stock options, but there’s no question retail investors also played a role in the comeback from the March lows.

Trading apps like Robinhood have made the public market more accessible to novice investors, but heavy losses have also been reported on the platform from those who might not understand the intricacies of the market.

In June, CNBC’s Jim Cramer warned that Wall Street professionals could take advantage of amateur investors by bidding up shares of companies that were popular at the time on the app.

“It’s a game. If it weren’t securities, let’s say it was Monopoly, let’s say it’s DraftKings … it would be so much fun,” he said on “Squawk Box.” “Pick a couple of stocks, you gun them in the morning, and then you hope people are stupid enough and they buy them.”

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