Catching the next “big short” is a popular pastime among professional investors, who tend to look at both sides of the market. The best opportunities are in identifying fraud. That comes from companies with either accounting issues (think Enron) or a non-existent product (think medical device company Theranos).
On Thursday, Hindenburg Research announced its latest shorting opportunity —Nikola Corporation, the electric vehicle startup that just partnered with General Motors this week. That report sent shares down in early trading today.
The Hindenburg report opens strongly:
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 fund goes on to describe how the company’s concept vehicle was rolled down a hill to create the appearance of being functional, issues with the company’s battery technology, and alleged sweetheart deals between the company CEO and family members.
Those are all standard claims for any fund alleging massive fraud. Hindenburg has backed up its claims with what it calls “extensive” evidence from employees. The firm alleges that Nikola’s success has only been because traditional automakers have been left in the electric vehicle dust by Tesla Motors.
That’s been enough to deflate Nikola’s post-GM partnership gains.
With the vetting by General Motors, an actual car company looking for a partnership for selling more of its batteries, it’s unlikely that Nikola is a fraud. Instead, it’s an acknowledgment that GM has the better battery tech right now, but Nikola is ahead of GM in electric vehicle design.
That said, it is an early-stage company. That carries substantial risk, especially as the company issues more shares to raise capital. And it’s attracted a sizeable following with retail investors, which can make for some significant changes in valuation in either direction.
Even Tesla Motors, which just had four profitable quarters in a row, just went from all-time highs to correction territory in less than a week. But that doesn’t make for a fraud—just frothy markets.
While the startup phase for Tesla proved to have several setbacks, including a large number of executive changes , the company has proven that it’s a viable car company now. So will Nikola in time.
Given that Hindenburg didn’t release this short report until after it built up a short position, the most obvious conclusion from all this is that the fund is trying to talk up its book . Any selloff may provide a welcome entry point for Nikola investors.