Public Markets Get Electrified
James Chanos’ rise to fame after his ground-breaking discovery of Enron’s 2001 fraud with losses totalling more than $74 billion granted him the title of the short-selling king of Wall Street. With this momentum, he led his group of infamous short sellers, known as the ‘cynics’, to profit off many high-profile corporate disasters and amassed over $7 billion in AUM for his dedicated short hedge fund just six years later.
Fast forward to today, however, and you can find Chanos, along with many short sellers, losing billions because of their common enemy: Tesla CEO Elon Musk.
Chanos and short sellers started bashing Tesla in October 2015, when the stock reached $220, and eventually applied enough pressure making it the most shorted company in America with over 18% of Tesla shares held short. Their investment theses did not seem too unreasonable since Tesla soared past competing automotive giants, such as Fiat-Chrysler, all while burning billions of cash and selling only a fraction of the cars as competitors.
But in the next five years, Tesla grew exponentially, smashing past earnings estimates each quarter. With a positive sales surprise and an ensuing higher reported profit in the first quarter, supplemented by the remarkable success of the Model 3 sedan, the stock rallied past the milestone $1,000 mark – squeezing short sellers further into bankruptcy.
This meteoric valuation still defies conventional Wall Street fundamentals. For example, if Ford, GMC, and Fiat-Chrysler combined together in to one mega-company, they would have 15x the revenue of Tesla but a valuation less than half. Additionally, their respective EV/EBITDA multiple’s lie between 2.0-4.5x, yet Tesla warrants a whopping 42.0x valuation prompting a majority of reputable financial institutions to issue the “sell” recommendation.
Tesla’s explosive growth, defying Wall Street’s typically cynical attitude, poses an interesting question: Do markets reward revolutionary, idealistic companies over basic fundamentals?
Tesla provides historical evidence of this but an even newer company, which rose astonishingly quicker, now moves the markets. Nikola, whose name also derives from the famed engineer Nikola Tesla, focuses on manufacturing hydrogen-electric trucks with zero emissions and recently became public through a reverse merger. The dramatic stock rise skyrocketed Nikola’s market capitalization past $23B, exceeding established automotive giants without selling a single vehicle.
Investors hope Nikola can grasp a sizeable piece of the multi-billion-dollar trucking market and expand into other profitable ventures such as sport vehicles and H2 solutions. In the future, the firm could even collaborate with oil & gas giants, using their established infrastructure to fuel the transition to clean energy.
Nikola’s timeline includes production of the Badger pickup in 2021, now available for reservation at $5,000, followed by long-haul hydrogen trucks in late 2023. Despite the handsome deposit, however, the company lacks a viable prototype, making the road towards profitability challenging.
Primarily held by retail investors, the insane valuation of Nikola provides further proof of investors’ excitement for futuristic, ambitious, and sustainable technologies. But although the rally rose to over $90 five days after its initial price of $35 on the June 4th reverse merger, the stock fell back to the $60-70 range as market skepticism grew.
The press and short-sellers brought a series of flaws and worries to attention recently, including lies from the CEO, Trevor Milton, about a functional model years ago, and sales projections derived from non-binding pre-orders with refundable deposits. Nikola’s valuation risks substantial downside from any delays of its timeline projections. However, with shares widely held by retail investors, and no major institutional lenders, Nikola proves extremely difficult to short. Ridiculous borrow fees of over 243% dissuades short-sellers from creating enough pressure for downward price momentum.
Although Nikola may appear fine in the short-term, news and announcements will heavily influence its stock. Take Nio, an electric car manufacturer from China, as a lesson. It experienced the same meteoric rise as Nikola several years ago but quickly plummeted months after, losing over 80% of its value in a year due to negative reports and sales delays. Additionally, Faraday Future, another California-based EV manufacturer had promising hopes and sufficient financing yet spectacularly crashed. The firm, led by CEO Yeuting Jia, a Chinese tech billionaire, and WeWork’s Adam Neumann, recently filed bankruptcy after burning through all their cash without producing a single car.
Overall, Nikola and Tesla both provide innovative technologies, but are their valuations justified? Despite Tesla’s sky-high valuation, the company can undoubtedly leverage the sophisticated infrastructure network, years of reputational history, and production success. Nikola lacks all those qualities yet rallied during the same period as Tesla, suggesting investors romanticize the idea of industry-shaking, ambitious goals over evaluating the business model. Nevertheless, the world needs the technologies Tesla and Nikola bring and their respective stock rallies will only further aid them in their quest to create sustainable transportation solutions for a greener world.