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Watch Out Robinhood Traders, Nikola Is the Sucker in the GM Deal

Last Updated September 23, 2020 2:31 PM
Mark Emem
Last Updated September 23, 2020 2:31 PM
  • Nikola Corporation’s stock surged after announcing a manufacturing deal with General Motors.
  • The deal will make GM into a significant owner in the new energy vehicle startup.
  • Nikola’s stock has been a favorite for millennials since it debuted on the market about three months ago.

Since listing publicly through a reverse merger in June, Nikola has been a favorite stock among millennials on the Robinhood trading app.

A strategic agreement between Nikola and General Motors may give millennials more reasons to invest in the new energy carmaker. Those who acquired the Nikola stock just days ago already have a reason to smile. After the deal with General Motors was announced, Nikola’s stock surged by 40% .

Nikola surged by double-digit figures after a deal with General Motors was announced. | Source: @StockBrain2010/Twitter 

But this agreement is no slamdunk for Nikola investors. General Motors is the big winner. Under the deal, the Detroit auto giant will manufacture electric and fuel cell-powered trucks  for Nikola based on GM’s technology at little to no risk.

For Nikola, the agreement provides little value. Here’s why.

1. An 11% windfall stake in Nikola

The deal will give General Motors an 11% stake in Nikola worth $2 billion as a prepayment. GM gets a board seat, too, enabling it to influence the Nikola’s direction.

The legacy carmaker could choose to cash out one year from now. Another third will be eligible for sale the subsequent year and another third the year after that. So far, GM is already enjoying paper profits.

GM’s stake consists of 47,698,545 shares at $41.93. The stock closed at $50.05 after the deal was announced, meaning GM registered paper profits of nearly $400 million on the first day.

The Detroit Free Press estimates that the deal will deliver for GM approximately $4 billion in benefits . The unquantifiable benefits for the Detroit automaker could be even higher.

GM CEO Mary Barra said the partnership with Nikola Motors is a validation of the Detroit automaker’s technology. Watch the video below:

2. GM tests out its tech at zero cost

The electric and fuel cell-powered trucks that GM will manufacture will be housed in upper bodies designed by Nikola. This means that Nikola’s contribution is just the look and feel of the trucks.

General Motors gets to test its technology on Nikola’s products in the real world at no cost. The market reception and feedback will be invaluable and can then be used to make improvements as GM prepares to launch its upcoming battery and fuel cell-powered brands.

Furthermore, General Motors will do this at a guaranteed profit. GM will get up to $700 million of capital expenses needed to manufacture 50,000 units annually.

General Motors
The GM-Nikola deal will require the Detroit automaker to manufacture at least 50,000 light-duty trucks annually for the new energy car startup. | Source: @WholeMarsBlog/Twitter         

Nikola will only be given an intellectual property license to market and sell the vehicles in North America. If they prove successful under the Nikola name, it would be a lost opportunity for GM not to market the same light-duty trucks under a different name in other parts of the world.

3. Free advertising for GM’s new energy tech

With renewable energy carmakers currently one of the hottest sectors right now, GM is benefiting from its association with Nikola.

Since Nikola will market the light-duty trucks that General Motors will manufacture, the latter will enjoy free publicity for its technology (besides the exterior design, everything else is GM’s). With GM positioning itself  as a supplier of battery and hydrogen fuel cells to other manufacturers, this is as good a deal for the Detroit automaker.

For GM, getting such a large order helps scale the production of its electric and fuel cell parts and components. This will help in reducing costs, thereby increasing GM’s competitiveness in the long run.

General Motors
GM is the clear winner in the deal as it getting all the monetary benefits at little to no risk. | Source: @DisruptResearch/Twitter 

In short, GM is getting a massive order for its new energy truck technology, all at a guaranteed profit. And it’s getting stock incentives, too. For such a lopsided deal, it doesn’t take a genius to see who got the raw end of the bargain. Hint: it’s not GM.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.