Nikola's Wonderful, Worrisome Week

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There's a lot of excitement about electric vehicles. There's a lot of investment capital out there for electric vehicles. When I look at the price of the company, I actually think that we're undervalued. I think where we're going over the next 3 years is going to be one of the greatest stories ever told. And if people are patient, they're going to have one of the funnest— in my opinion, one of the funnest rides they've ever had in their life in Nikola.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Trevor Milton. He's the founder of Nikola, which plans to make big rig trucks that will run on hydrogen and battery power. Nikola had a dramatic week, including a newly announced partnership with General Motors that sent the stock racing and a brutal report from an investor betting against Nikola, which threw shares into reverse. More from Trevor in a moment. We'll also hear from Wharton professor Jeremy Siegel on his rip-roaring bull case for stocks. Can I get an ole? Listening in as always is our audio producer Meta. Hi, Meta.

Hi, Jack.

I always think of the week after Labor Day as the time to get refocused on my labor. Summer vacations are over, the kids are back in school. Time to stop phoning it in. Although technically this year the kids are in Zoom school from home and Meta, you and I are still working from home, which I guess means we will be quite literally phoning it in. But we have big plans. Should I tell listeners about who we'll hear from next week?

Yes.

I'll give them a tease like they do in show business. You ready?

I'll cue up some music, hang on.

There you go.

Clue number 1 is he's the founder of a company that streams flicks on the net. And clue number 2 is he's Reed Hastings of Netflix. Come to think of it, clue number 1 might have been unnecessary. Now, I want to point out 2 new milestones in America's economic reopening. First, New York City, where you live, Meta, said this past week it will allow indoor dining at restaurants up to 25% capacity starting September 30th. New York was hard hit by the pandemic and it's an important economic contributor. Plus I have friends who own restaurants there, so that's good to see. And second, the Goldman Sachs U.S. reopening scale ticked up to a 5 out of 10 this past week. We've talked about this before. Goldman tracks a list of what it calls back-to-normal metrics, like the number of airline passengers and the amount of movie ticket sales. It also tracks stay-home measures like video conferencing activity, and it turns these measures into a number from 1 to 10, with 1 representing where we were back in late March and 10 being where we'll be when things get back to pre-pandemic levels. So the index was stuck at a 4 for several weeks Goldman attributes the latest uptick to 5 to meaningful progress, as it says, over Labor Day weekend in back-to-normal categories like lodging, retail, and box office, although some stay-at-home categories like video conferencing continue to do well too. And speaking of box office receipts, we recently had the CEO of IMAX on this podcast to talk about why Hollywood has been looking at a movie called Tenet as a key part of the comeback story for theaters. Since then, Tenet has had a muted start in the U.S. after a strong start overseas. Keep in mind that a lot of theaters remain closed and that the ones that are open are operating at reduced capacity. Worldwide ticket sales have been around $150 million, and Variety estimates the movie needs $400 million in ticket sales to break even. So we can't quite call Tenet a runaway financial success, but it's a start, and hopefully moviemakers and theater owners can figure out how to make more money safely until the pandemic passes. Let's say a few quick words now about the stock market. I'm close to what you call a stock market perma-bull. I nearly always guess up because I don't have any special ability to predict short-term movements, and stocks rise more often than they fall, and that's overwhelmingly the case over long time periods. Stock prices this year have bounced back much faster than company earnings, and shares look expensive, but I've stuck with them in part because bond yields look worse. A couple of weeks ago, however, I told listeners I had reduced my stock exposure, not just because of valuations, mostly because I'm worried about the possibility that a delayed election result in November could turn into a disputed election, and that our politics have gotten so toxic that it's unclear to me how we'll cope with that. I don't think the stock market will like the uncertainty even before Election Day arrives. I hope I'm wrong and that I miss out on a little bit of upside and go back to a normal stock allocation later this year and everyone laughs at my mistake. And since I'm taking a rare break from my near perma bullishness, I wanted to hear this week from someone who's more bullish than me and not by a little. Hi, Professor. It's Jack Howe from Barron's. How are you?

Hi, Jack.

Thanks for making a few minutes to speak with me.

Yes, thank you.

Jeremy Siegel is a professor of finance at the University of Pennsylvania's Wharton School and an advisor to WisdomTree, which runs exchange-traded funds. He's been consistently upbeat on stocks for decades, which means that even if you've taken his advice at the worst possible moments, like the peak of the dot-com stock bubble in 2000 or the housing bubble in 2006, you've done Okay, and if you've taken his advice any other time, you've done pretty darn well. I asked Jeremy what he thinks about the stock market bouncing back to new highs so quickly. He mentioned monetary expansion, where the Federal Reserve creating new money to do things like buy bonds, which holds down interest rates and can boost investor confidence. And he mentioned government assistance like the Paycheck Protection Program, which provided an incentive for small businesses to keep workers on their payrolls.

In the first 4 months since COVID struck, had more monetary expansion than the entire year that followed the Lehman bankruptcy. This is going right into the pockets of the consumers.

Jeremy says that with people not traveling or going to restaurants, bank accounts have been built up and that the economy is likely to boom next year, especially once vaccines and better treatments for COVID-19 become available. He thinks companies are headed for excellent profits.

Firms are, you know, repositioning themselves, getting rid of deadwood and excess employees, excess expenses. And all the talk about the data last week, no one seemed to talk about the productivity boost of the second quarter of over 10% a year. That's a half a century We have not seen a quarterly increase in productivity. That is a drop-to-the-bottom-line type of productivity increase.

Let's add a little footnote here. As Jeremy says, we had a 10.1% increase in worker productivity during the second quarter, and that's the highest of any quarter in the past 50 years except for the first quarter of 1971. But that's not necessarily the miracle that it seems. What is productivity? From person to person, it can feel like a subjective thing. Sarah might be pretty sure she's a more productive worker than Rick and that she deserves more money, and Rick might have other ideas. But for society as a whole, productivity is a straightforward measure. It's the value of goods and services produced per hour worked. Under normal circumstances, rising productivity can be a sign that, for example, companies are becoming better at managing their workers, or that investments in machines and software are paying off. But these aren't normal circumstances. Average hourly pay jumped 20% during the second quarter. That's a post-World War II record, but we know it's not a great backdrop for jobs. What has happened is that workers who lost their jobs during the pandemic tended to be low-wage workers. The Federal Reserve Bank of San Francisco published a paper on this subject at the end of August. It found that during the months following the COVID-19 shutdown, the bottom one-quarter of earners suffered about half of the job losses. Think of all those people working at mall stores, theme parks, restaurants, and movie theaters. Low-wage workers also happen to be on the lower end of worker productivity in the economic sense. Now, to be clear, I don't mean that they don't work hard. In my younger days, I worked at both a restaurant and a mall store, and I hustled. I mean, that average economic output per hour for these workers is lower than it is for, let's say, a software engineer. So the recent jump in average wages and productivity doesn't mean the economy suddenly bounced back to better than ever. It means a lot of clerks and servers are still looking for work. We very much want them to find work, not only because we care about their well-being, but also because clerks and servers are themselves important customers. We want them to be able to spend. But I take Jeremy's point that companies appear to be headed for higher margins and profits. They've done a lot of cost cutting during the downturn. Jeremy says that some tech stocks have run up too far this year, but he notes that their prices have come down a bit in just the past couple of weeks, which he views as healthy. He's quite optimistic about broader returns from here.

Right now, I believe that stocks will probably return somewhere between 4.5% and 5% after inflation, a real return. I think, and I've been lecturing this before COVID I think the new normal P/E ratio is 20 in an economy with low interest rates and low transaction costs, et cetera, and so on.

P/E is, of course, the price-to-earnings ratio, and the historic average for the U.S. stock market is about 15. Right now we're closer to 20, so Jeremy's saying that he thinks today's valuations are the new normal. Also, those yearly returns he mentioned are after inflation. If you don't adjust for inflation, Jeremy thinks stock returns could average 7 to 10% from here. Other people we've heard from on this podcast have said that returns will be maybe half that much from here because starting valuations are high. Jeremy is not only much more bullish than others on stocks, he likes some other assets like houses and gold.

I think residential real estate is gonna do extremely well. It already is. Gold, and you know, I mean, I was one of the people when I used to show my charts that I said, yeah, stocks are 6.7% after inflation and gold has yielded 0.3 or 4 or 5% after inflation. Everyone laughs and giggles. For the first time, In my, you know, history of being a professor, I recommended gold 3 months ago. I just said because of what I saw going on in the monetary market.

One of the reasons Jeremy likes gold is that he expects a return to faster inflation than Wall Street is predicting, and that would be bad for bonds, and Jeremy does expect them to be poor performers. But what does that mean for a typical 60/40 investor, someone who has 60% in stocks and 40% in bonds? I mean, they could put that 40% in cash, but then they might fall behind inflation. Jeremy says that same investor should consider putting 75% to 80% in stocks with a focus on safe dividends to replace some of that bond income. Jeremy also says it's important to diversify internationally, including in emerging markets. So there you have his bullish case. I'm probably not going to go to 80% stocks or even 60% stocks until after the election, but history says you're better off following Jeremy, not me. I try to stay invested, but I'm not perfect. I at least have the sense to never get totally out of stocks and to try not to keep my exposure too low for too long. My chickening out is short-term. The long-term outlook for stocks remains fairly bright, in my opinion, and in Jeremy's opinion, bright enough for sunglasses and a beach umbrella. Meta, that beach imagery was for you. I know how much you love the beach.

I do love the beach.

I like everything except the sun and the sand.

What's left? The water?

Oh, that's too cold. Great.

So just ice creams.

Ice creams I'll take. Let's talk about trucks. I feel like this is a great opportunity to play a little Truckin' by the Grateful Dead, but there's something called fair use in copyright law, and I don't know what it means, but Meta does, and I'm pretty sure she's not going to let me play Truckin'. Meta, if I'm right, just hit me with an 18-wheeler horn blast. 10-4, good buddy. So a company called Nikola had an eventful week on Wall Street, and I'm going to try to stick with the pronunciation Nikola as much as I want to say Nikola. For listeners who aren't familiar with Nikola, it was founded 6 years ago in Salt Lake City by a serial entrepreneur named Trevor Milton. The company designed zero-emission big rig trucks that can run on hydrogen. Why trucks and why hydrogen? Hold on to that thought for a moment. Nikola went public just this year. In an earlier episode of this podcast, we talked about SPACs or special purpose acquisition companies. Those are publicly traded shells that exist for the purpose of buying private businesses, thereby taking them public. Nikola merged with one of those. Before the deal was announced in March, the SPAC traded at $10 a share and change. By the time the merger closed in June, the company, now called Nikola and traded under the ticker NKLA, traded above $30 a share. And before the end of that same month, it had traded above $70. But the price had fallen back by about half to $35 up until the beginning of this past week. Nikola is a controversial company. Since summer, its high-flying shares have given it a market value of more than $10 billion and at times over $20 billion. But the amount of money the company actually makes rounds to zero. And when I say that, I don't mean Nikola's expenses are about as high as its revenues, resulting in negligible profits. I mean that its revenues are negligible because it has no vehicles in production and probably won't for a couple of years. After expenses, the company burns hundreds of millions of dollars in cash per year and is expected to for years to come. The bull case on Nikola is that it's another Tesla in the making, and Tesla is much more valuable than Nikola. Its stock is up more than 600% over the past year, recently valuing that company at $340 billion. The bear case on Nikola is that, well, Tesla's had vehicles on the road for more than a decade and its vehicles have proven popular. And by the way, the fact that something is cheaper than Tesla doesn't make it cheap. Tesla was recently valued at $1 million per vehicle it produces versus $10,000 per vehicle for traditional carmakers. That's an ambitious price to say the least. Should I point out the irony that two companies known for lofty values are both named for the great Serbian-American inventor Nikola Tesla, who's known for not quite striking it rich? I shouldn't point that out? Okay. Anyhow, this past week the bull and bear cases on Nikola collided head-on. First, the company on Tuesday announced a partnership with General Motors whereby GM will take a stake in Nikola, and it will manufacture a fuel cell pickup truck that Nikola has designed called the Badger by the end of 2022. I know that I said Nikola was into big rigs, but it has plenty of other plans beyond pickup trucks. It has designs for wave runners, off-road vehicles, even military vehicles. The GM announcement sent Nikola shares up 40% on Tuesday. Short sellers, or those who bet against the stock, got clobbered. But over the next 2 days, the stock gave all of that back and more. An investment company called Hindenburg Research published a lengthy report attacking the company. Hindenburg has sold Nikola stock short, so it will profit if the price declines. Should I mention the irony that a firm called Hindenburg is making inflammatory claims about a maker of hydrogen vehicles? Definitely not. Got it. I had a chance this past week to speak with Nikola founder Trevor Milton. This was after the GM announcement but before the Hindenburg report was released. The report alleges that the company misled investors and partners about its technology, citing what it said were recorded phone calls, emails, text messages, and photos. In a press release, Nikola called Hindenburg's claims inaccurate, salacious, and motivated by greed, and said it's exploring legal recourse. I'm not siding with either Trevor or the short seller. I want to see some vehicles in production and some revenues, which could take years. But I'll play some of my conversation with Trevor where he makes his case for Nikola and let listeners decide for themselves. Hi Trevor. Hi, it's Jack Howe from Barron's. How are you?

Hey, good. How you doing?

Doing great. Thanks for making a few minutes to speak with me.

No problem. Jump right in.

I asked first about the GM deal. My initial reaction to it was that each side gets something it very much needs. Nikola gets the implied seal of approval of doing business with a long-established company. GM says it will get $4 billion in benefits. Including its Nikola stake, supply contracts for its batteries and fuel cells, and payments for manufacturing the Badger. But I suspect it wants something equally important. As CEO of GM, Mary Barra has gotten the company out of its loss-making Europe business and consolidated vehicle platforms and greatly reduced the number of vehicles that GM has to sell to turn a profit. I've spoken with her a few times and written favorable things about her performance. But what she hasn't done is made a profit for shareholders. GM stock is down a couple of percent, including dividends, since Mary was announced as CEO back in 2013. The S&P 500 index has returned 120% over that same period. The stock market is a fickle thing. It's not Mary's fault that investors have fallen out of love with old economy value stocks, no matter their earnings. And into love with new economy growth stocks no matter their earnings. But it's a lot to ask of GM shareholders to miss out on one of the best bull markets of all time for going on 7 years now. GM already has electric and autonomous vehicle programs of its own, but the Nikola deal seemed to put a tiny bit of Tesla-like shine on GM shares. They jumped 8% the day of the announcement, But after the Hindenburg report, GM stock erased that gain. I asked Trevor to explain why he thought the GM deal was important, and he described it as a big money saver.

Our number one cost on all of our programs is our battery. Number two cost is the engineering that, you know, that goes behind it in the supply chain. GM solves all those problems pretty much. We've developed our own batteries, but our prices were about 30% higher than GM's pricing. We looked at their tech. It's great tech for what we're looking for. And it's going to save us a minimum of $4 billion just on the battery costs alone. And we're up to over almost $10 billion in total cost savings across all platforms.

Trevor says it was a great deal to trade $2 billion in equity for what he estimates will be $10 billion in savings.

That's going to put us at more competitive pricing than even Tesla on our batteries. And that's a dream come true.

Nikola has designed vehicles that run on batteries like Teslas and on fuel cells that use hydrogen, which is more unique. I asked why fuel cells and why the company is focused on both technologies instead of choosing one. Here's Trevor.

So this is what's unique about Nikola. I mean, more than most other companies, and almost everyone's kind of coming around to what we do. Fuel cell and battery really don't really compete with each other. And the market kind of makes it, they kind of think that there's this big competition. It's like battery or fuel cell. It's not true. So in both electric trucks and electric semi-trucks, battery electric's really good for stuff you do around the city, up to 300 miles. If you want to go over 300 miles or you start to pull a trailer, that's where hydrogen really makes sense is because it holds so much more energy density than batteries ever will. And that's the advantage of hydrogen over battery electric.

Why focus on big trucks? Trevor says that's because of the long distances they travel, which he says makes hydrogen a better deal. Why is now the right time for hydrogen fuel cells? Trevor says it's because the company has been able to reduce the cost of building fueling stations by 80%. It has plans to build 700 stations.

You've seen over the last 6 months more hydrogen news around the world than you've ever seen in your life, and that's because Nikola really pioneered the ability to reduce the cost across the entire supply chain to drive hydrogen costs down.

Trever says Nikola's network of fueling stations will help it make much more from each of its trucks than just the sale price. He says semi tractor-trailer customers will use a leasing model where they'll pay a cost per mile that includes the truck, the maintenance, and the fuel. For the Badger pickup truck, Trever says it'll have combined fuel cell and battery electric capability so that customers won't have to choose.

That's a really cool thing that we have that no one else has in the world, is this truck that can run on battery and hydrogen, one or the other or both. So you can go 600, 700 miles on a fill, or you can just top it off with electricity if it's cheap and drive it around on electricity.

Maybe you've seen the Cybertruck that Tesla says it will launch beginning late next year. It looks militaristic, space age, like something I might have sketched during a middle school study hall, only without the laser gun turrets. Trever says that's another advantage for Nikola and maybe for another electric pickup company called Rivian.

All the people that buy Ford F-150s, most of them are not going to buy a Cybertruck. They're going to be buying a Nikola Badger or Rivian. They want a real truck. They want a conventional truck. They want to be able to use a bed. They want to throw hay in the back. They want to put four-wheelers in the back. They want to have room for their families. They want to have, you know, the conventional look. And I think that's why you're going to see the early adopters. We got plenty of them for us. I don't— I think there's enough room for 3 or 4 people, and after you get into that, it'll start to get a little saturated.

Pickup trucks are enormously lucrative. Companies like GM and Ford make the bulk of their profits from pickups and big sport utility vehicles. Why would GM want to partner with Nikola on a pickup, thereby supporting what might one day become a competitor? Trevor says that Nikola was going to be a competitor to GM regardless. And the GM decided that being in Nikola's camp was better than being a competitor. And the GM stands to drive down costs for its trucks and make money on the equity stake.

Say they receive a few thousand dollars per vehicle reduction. That's billions just by cross-utilizing purchasing with us on our parts. And then the stock value increase that they get with 11% stake in our company is going to be worth billions and billions of dollars too. So for them, it's an absolute no-brainer. Even if some of the customers go away from their platform, they would go away from me anyways, so they have nothing to lose.

Speaking of the stock, what does Trevor make of Nikola's price? Tesla founder Elon Musk once tweeted, quote, Tesla stock is too high IMO, or in my opinion. That was May 1st of this year. The stock was around $140 then, adjusted for a recent split. After Elon tweeted that, the stock kept soaring. It briefly topped $500 a share a couple of weeks ago before selling off. Maybe you're thinking that I misspoke just now or that you misheard me. Maybe you're saying, Jack definitely didn't just tell me that Tesla stock more than tripled in price within 4 months of the founder and CEO tweeting that it was too expensive. But I did say that. So does Trevor think the same thing about his shares, that they've gotten a bit rich? He does not.

There's a lot of excitement about electric vehicles. There's a lot of investment capital out there for electric vehicles. When I look at the price of the company, I actually think that we're undervalued. I think where we're going over the next 3 years is going to be one of the greatest stories ever told. And if people are patient, they're going to have one of the funnest— in my opinion, one of the funnest rides they've ever had in their life in Nikola.

Again, I just want to stress Fun ride or not, I recommend investors wait to learn a lot more about Nikola's products before hopping onto its shares. Meta, do copyright fair use laws allow us to close with the theme song to the 1979 television masterpiece BJ and the Bear about the noble adventures of freelance trucker BJ McKay and his chimpanzee passenger named Bear?

Maybe.

Hmm, just in case, I'm singing us out. Rolling down to Dallas, my wheels provide my palace. I'm off to New Orleans or who knows where. Places new and ladies too. That part seems inappropriate and I don't condone it. I'm BJ McKay and this is my best friend Bear. Thank you for listening. Meta Lutzoft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's @JackHough, H-O-U-G-H. See you next week.

At CLA, we're in your corner and on it. We coach tax strategies and Little League first base. We help you adopt AI data tools, and we adopt rescues named Buddy. We walk your factory floor and jog the local 5K, though sometimes we walk that too. Wherever you're coming from, we're right there with you. Wherever you're going, we'll get you there. CLA—CPAs, Consultants, and Advisors. Learn more at claconnect.com/withyou.