Spacs/Nikola: fresh-baked fruitcake
Main outputs at the moment are glossy PR and optimistic profit projections
Spending the year in and out of lockdown required the acceptance that gratification would often be delayed. No such patience was required from US vehicle technology companies that avoided the traditional slow trundle to the market. Instead, they merged with listed “blank-cheque” businesses, also known as special purpose acquisition companies. They hope they will be cranking out thousands of cars or components in a few years. For the moment, their main outputs are glossy PR and optimistic profit projections.
Nikola is the most notorious. After its Spac merger, the market capitalisation of the electric trucks group soared to nearly $20bn. The group even inked a partnership with General Motors, which took a 12 per cent stake. A short-seller’s report shortly afterwards challenged Nikola’s technology. It included the revelation that the truck in a video was propelled by gravity, not electricity. Flashy founder Trevor Milton stepped down from the board as controversies multiplied.
Lex is a longtime sceptic concerning plans to power heavy trucks — and some types of aircraft — with electricity. Currently, the power-to-weight ratio of batteries is too low. We have therefore selected Nikola as the fruitcake in today’s food-themed festive review.
The battered shares mean the company now has a market capitalisation of just $6bn. The company maintains it should start delivering electric trucks in a couple of years. Nikola and peers such as Fisker and Hyliion believe that if their 2024 and 2025 earnings projections are simply discounted to a present value, their valuations remain reasonable, single-digit ebitda multiples.
A Financial Times study of listings from more than 80 Spac IPOs between 2015 and 2019 shows that 60 per cent now trade below the $10 a share threshold price. Among the minority of Spacs that have appreciated substantially, the largest sub-category are speculative vehicle start-ups.
Blank-cheque mergers were historically focused on undervalued or downtrodden sectors. Growth companies in frontier specialisms ranging from cannabis to tele-health now dominate Spac deals. The trend means these transactions smack more than ever of a market overreaching itself.