Nikola – Keeping on Truckin’ or Running out of Charge?

On September 10, Hindenburg Research announced that it had uncovered evidence of fraudulent marketing at Nikola Corporation that was resulting in artificially inflated share prices. It seems somewhat ironic that an investment research firm with such a name would have launched this investigation into a company that is developing a hydrogen cell powered truck. While hydrogen fuel cells are of course safe, the association of the words of hydrogen and Hindenburg has not always been a happy one!

Needless to say, this took the shine off the anticipated move by GM to take an 11% stake in the company and, coinciding with news of the Executive Chairman resigning over alleged sexual abuse allegations, there was a 60% drop in the share price. (At the time of writing, the share price has recovered a little as negotiations continue with GM despite missing the end of September deadline. Additional assurances on Oct 1 by the management team also assisted the upward trajectory of the market price)

A closer look at the data shows that Hindenburg were not alone in their stance taken on the NKLA share price, as reflected in activity among short sellers. Notwithstanding the GM acquisition overtures, there is persistent uncertainty as to what will eventually happen. These are of course similar and familiar trends to those of Tesla in the early days to be seen here. However, where Nikola differs is that, rather than growing organically like Tesla, NKLA has sought and apparently obtained a willing partner in GM that wishes to leapfrog over Tesla.

The following chart (Source: Hazeltree Data Analytics) shows that the move in NKLA away from the long holders (blue) towards the short holders (green) in the HF space started in July and gathered pace until, especially since the GM announcement and the explosive Hindenburg allegations….but for the last couple of days, more about which below.

With the drastic reduction in the share price, one might have expected that there would have been a certain amount of short covering to take profits. This did in fact start happening during the day on September 30th following the announcement of continuing talks but, as of 1st October, notwithstanding, and perhaps because of, the share price increase, another 4 million shares were borrowed for shorting from institutional supply taking outstanding volume of securities borrowed to 45 million. The interesting feature however is that although the short positions are growing this would appear to be at the behest of a core number of shorting entities rather than a more widespread shorting activity given that the short holders scores have reduced somewhat over the last couple of days as the management team and GM exert a calming influence.

The graph below (Source: FIS Astec Analytics) shows outstanding positions on loan (green line) against utilization of available lendable institutional supply (blue line). Notwithstanding this, a utilization number in the mid 70s range shows that there is still some supply, should the short sellers be looking to increase their positions. For this reason, the fee for borrowing these securities by the buyside market has remained in the lower ‘hot’ range of 25% pa or so but that may change as utilization increases. (Source: the HT ENSO rate)

The parallels with TESLA early days and indeed its history of being one of the biggest long-term shorts on record are unmistakable and seem to be the norm in an industry where there is so much hype around new, disruptive technology. There are some exceptions to this rule apparently as companies like Rivian are still remaining private, hoping to avoid some of the public pitfalls that have engulfed some of their competition like NKLA. The electric car industry will be interesting to watch over the next few years, as the expansion of re-charging networks becomes a reality and driving ranges increase. In the meantime, new cycles of shorting in this sector may be expected.