General Motors and Nikola Cooperation; Which Stocks to Buy?
7 minutes for reading
On September 8th, the quotations of General Motors (NYSE: GM) stocks leaped up by 9% all of a sudden. The reason was electric cars: that day, it became known about the partnership between GM and a young innovative company Nikola (NASDAQ: NKLA).
The two companies publicly announced that they would be working together from now on; however, if we look back in history, we will see that they have been interacting since quite long ago.
Firstly, GM engineers became fuel cell advisers in Nikola.
Next. Steve Girsky, who used to be the GM vice-chairman until 2016, upon leaving General Motors, created a company called VectolQ, LLC that announced merging with Nikola in July 2020; thanks to the merging, Nikola stock price grew from 35 to 93 USD.
And the first person to call Nikola was Mary Barra, the director-general of GM, offering official cooperation in designing fuel elements of the company’s electric truck.
Thus, GM always kept an eye on Nikola designs; now they announce to the public that they will work together. As a result of the trade, GM acquires 11% of GM stocks and the right to appoint one member of the board of directors.
Why is the cooperation profitable for Nikola?
Having friends is always good, especially when your friend has employees, productive capacities, technologies, and MONEY 💰💰💰: one may only dream about such friends in business.
For Nikola, such a partner is advantageous for one more simple reason. The company presented to the public the truck models One, Two, and Tre but has not started serial production of any of them. At the same time, the company states that has received preorders for over 10 billion USD.
Obviously, Nikola needs both production capacities and investment, so, cooperation with a larger company is a necessity.
The first thing that Nikola will get from the partnership with GM is decades of experience in supplying, design, production, and testing cars. Otherwise, the company would have to acquire this experience on its own, by trial and error and at its own expense.
Other things are access to a huge stock of constituent elements, cooperation in designing fuel components, storage batteries, and production capacities. The most important part for Nikola is production – this is what Tesla (NASDAQ: TSLA) still lacks.
Badger 4x4
With the help of GM, Nikola plans to design and produce its four-by-four called Badger, saving 5 billion USD thanks to the cooperation.
Just compare: the market capitalization of the company is slightly more than 14 billion USD, which makes 5 billion USD a truly significant sum. It is promised that one charging will last for up to 960 km; the car will cost about 60,000-90,000 USD.
The main rival of the Badger in the US market is a pickup Ford F-150 that has remained number one in this sector for 43 years. Currently, Ford is building a plant where it is planning to produce an electric four-by-four. Serial production is due to start in 2022, which means Nikola still has time.
Another rival of the Badger may be a four-by-four by Rivian Automotive that has yielded the support of such giants as Amazon and Ford. As you see, the competition is tough; however, the buyer will be the winner anyway because they will have a lot of choice options.
Why is the cooperation profitable for GM?
GM is planning to get 4 billion USD of profit from this cooperation.
Nikola will be obliged to buy from GM batteries, fuel components, and pay for Badger production. Also, GM will enjoy a tax relief from the US government for producing electric cars and will become an exclusive supplier of fuel components for Nikola all over the world.
An indirect advantage will be the extension of the sales market of storage batteries and fuel components, as well as an entry to the market of batteries for cargo transport. Additionally, joints studies of the electric cars sector may lead to higher technological development of GM.
The part of GM in Nikola will be gradually blocked, which means the company will be able to sell Nikola stocks starting the next year and up to 2025.
Now to the main questions.
Which stocks will grow?
Before the pandemics, GM used to make a profit of over 30 billion USD. The 4 billion USD profit from the cooperation with Nikola, especially extended time-wise, may seem insignificant.
Currently, the car producer has an only electric car on sale – Chevrolet Bolt EV.
In the second quarter of 2020, just 2,498 cars of this model were sold. To compare; Tesla during the same period sold 80,277 Model 3 electric cars.
The only electric 4x4 planned in GM is Hummer EX; its release was scheduled for May 2020. However, the pandemics corrected the plans, so the release was rescheduled for the autumn. Serial production will start at that time as well. After the sales start, Hummer EV will join the rivalry.
The Badger produced by GM for Nikola will belong to Nikola and, in fact, compete Hummer EV. In the end, it seems that currently, GM is counting on selling storage batteries and fuel components.
The stocks of the company that sky-rocketed after the news about the cooperation, returned to the previous levels two days later. However, a breakaway of the 200-days Moving Average signifies a possible development of an uptrend in the future.
However, the company is very large, and for its stocks to grow like, say, Tesla stocks, it needs to produce hundreds of thousands of cars, if not millions. All that GM has now is plans. Thus, it is quite hard to assess the influence of the cooperation with Nikola on GM and its stock price.
A car analyst recommends GM to single out a separate company that will deal with all the questions concerning electric cars. A small company supported by GM will easily take its place in the market and attract investors that will be happy to invest their money in a young and promising company.
Nikola stocks are likely to grow
Unlike GM, Nikola is a small company. It currently produces not a single car serially. Its stocks are growing not on its achievements but mergings and future perspectives. Imagine what will happen when the company announces the serial production of a car. Clearly, the potential for growth here is much higher than in the case of GM.
Nikola issued 47 million of its stocks for GM, which increases the number of the stocks from 361 million to 408 million papers. This, in turn, must affect the stock price negatively and lead to a slight decline which, however, will be just temporary.
No surprise that the day after the merging was announced the stock price started falling. Now it amounts to 15 USD per stock.
Closing thoughts
The way of Nikola is slightly similar to that of a Chinese car producer called NIO (NYSE: NIO). The company also produces its cars on the JAC plant which belongs to Volkswagen. Initially, after the IPO in an American exchange NYSE, the management promised its investors to build its own plant, and money was invented in the construction.
As a result of the “deceit”, the stock price fell from 12 to 2 USD but now the demand for NIO cars is restoring, and the company returns to the idea of building its own plant. So, now there is an uptrend on the stock chart: the price is already over 18 USD while in April 2020, it was below 3 USD.
As for Nikola, even in cooperation with GM, it remains an independent company. By 2025, there will be no GM representatives in the board of directors. In the remaining time, Nikola needs to get maximum profit from the cooperation.
Its own production will be a breakthrough for Nikola. By this moment, you should have the stocks of the company in your portfolio; nonetheless, the company is already promising, which must also have a positive effect on the stock price.
