A Deal That Tesla And Ford Should Be Scared Of
Nikola (NASDAQ:NKLA) caught my attention earlier this year for a couple of reasons the number one being its position as competition to Tesla (NASDAQ:TSLA). The announcement Nikola was targeting the F-150 market is another reason and one I think responsible for the stock’s sudden rise to fame. Tesla, for sure, has its eye set on the pick-up truck market but let’s face it. The Tesla truck isn’t something most consumers are going to buy when there is an F-150 replacement that runs on batteries too.
Which is why this new deal with GM (NYSE:GM) is such a big deal for the electric car market. GM just announced a deal with Nikola that should have execs at both Tesla and Ford (NYSE:F) running scared. With the backing of the U.S. largest auto manufacturer, Nikola could very well upend the market for both companies.
The F-Series, if you didn’t know, is America’s #1 selling line of trucks. During the 2nd quarter of 2020, even with the pandemic curbing sales nationwide, the F-Series outsold the #2 competitor by 32%. In terms of market share, the F-Series is worth about 30% so it’s no small thing this deal we’re talking about.
What The GM Deal Means For Nikola
Nikola announced this morning GM would become its strategic partner for manufacturing. This means Nikola trucks will soon begin rolling out of GM plants. The partnership will begin with the production of the Nikola Badger which, I have to admit, is a good-looking truck. It kicks the pants off of Tesla’s design no matter how aerodynamic it is. The Badger boasts 0-60 is under 3 seconds, 980 ft-pounds of torque, 8000 pounds of towing capacity, and a 600-mile range to go with its rugged appeal and crew-cab seating.
The partnership will extend to other models at a future date with expected cost-reductions across the entire production line. Nikola will utilize GM’s Ultium batter system and Hydrotec fuel cell in the production models setting a key milestone for GM.
The deal is reported to be worth $2 billion in newly issued stock that entitles Nikola to certain in-kind contributions. What this means for Nikola is expanded production and $4 million+ in cost-savings over the next ten years. For GM it means at least $4 billion of tangible benefits including the equity value of the shares and expected sales of EV components. The terms of the deal value Nikola at just over $41 per share or about 30% above the previous week’s closing prices. GM will be subject to a staged lock-up agreement that is set to expire in 2025. The deal is scheduled to close at the end of the month.
The Analysts Are Already Changing Their Tune
Bullish sentiment toward Nikola had been cooling but that’s already changing. Wedbush Securities analyst Danial Ives calls the GM deal a game-changer for Nikola. "This news is a huge shot in the arm for Nikola and cements credibility not just for its Badger production slated to begin by the end of 2022 but for its hydrogen fuel cell ambitions and semi-truck vision going forward," he writes.
The Technical Outlook: Nikola Reversal In-Play
Shares of Nikola posted an impressive rally earlier this year but gave up most of the gains over the summer. Now, the stock is confirming a bottom at the $35 and poised to complete a reversal that could have shares retesting the June highs by the end of the year. The GM news has shares up about 30% to trade above the target $41 price level and just below a key resistance line. Resistance is at the August high, if and when that is surpassed shares will likely hit $60, $70, and $80 in quick succession.
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Should you or shouldn’t you? Many investors are wondering if it’s time to take some profit. With so much uncertainty in the market, there can be a temptation to take your profits and run. That may or may not be a good strategy. It’s true there are some speculative stocks that are going up on nothing but faith, trust, and pixie dust. But there are other stocks that may still be good buys despite continuing to grow.
Since the sell-off caused by the novel coronavirus and subsequent locking down of large portions of the economy, the stock market has recovered nearly all of its losses. The Federal Reserve has done its part by pledging to keep interest rates low for as long as it takes. New housing starts are up. Unemployment is coming down. There seems to be a lot of fuel for market bulls.
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View the "7 Stocks It May Be Time To Take Profits On".