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Bear Of The Day: Nikola (NKLA)

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Nikola (NKLA - Free Report) bulls have gotten their face ripped clean off this week with the start-up's survival being put into question. Following Hindenburg Research's (appropriately named) strongly-worded report about Nikola misleading investors, "Tesla Wannabe's" CEO, Trevor Milton, stepped down.

This 'tactical' move by Nikola almost feels like an admission of guilt. Get the one responsible for this ostensible felonious securities fraud out so that the company can keep itself together.

Since Milton announced his resignation on Sunday, the share price has capitulated over 38%, likely blowing out many retail investing bulls' trading accounts.

Losing Critical Relationships

Hindenburg's accusation, combined with Milton's "early retirement," has many of Nikola's potential partners questioning the business's legitimacy. Relationships with energy enterprises like BP (BP - Free Report) to build hydrogen-refueling stations are crucial to this alt-energy automotive start-up's future success. Now conversations with these potential partners have halted, plummeting NKLA shares 26% yesterday alone.

If Nikola were to lose its key hydrogen-refueling relationships, it could spell the end for this alternative energy-driven automotive start-up.

Sell-side analysts across the board have been lowering their EPS guidance for weeks, pushing the stock into a Zacks Rank #4 (Sell). After yesterday's shambles, I suspect that we will see another set of sizable downward EPS revisions, that will likely push NKLA down to a Zacks #5 (Strong Sell).

Apprehension From The Beginning

I had been very apprehensive about NLKA shares since they surged past Ford's valuation. A company that hasn't sold a single car being more valuable than a 117-year-old automotive giant?

The valuations looked stretched out of the gates with FOMO ridden retail investors driving the bid to seemingly no end when it went public in early June. The shares even IPO'd in a very precarious way, through a special purpose acquisition company (aka SPAC).

A SPAC is a company that goes public on nothing but the promise to purchase a business at some point in the future. This year, more than $33 billion has been raised through SPACs, which, in my mind, signals overoptimism in the equity markets.

These SPACs seem to be a cesspool for overzealous retail investor excess, which can be exemplified with the surge in Virgin Galactic (SPCE - Free Report) and its eventual drop-off. DraftKings (DKNG - Free Report) is also a 2020 SPAC IPO that is still sitting at a crazy high valuation, but this betting stock is nothing short of a gamble at its enormously frothy levels. It is only a matter of time before DKNG experiences a similar decline.   

Final Thoughts 

NKLA appears to have been a double whammy of disaster with an enormously stretched valuation from overexcited investors & traders combined with what seems to be a mounting securities fraud situation that has halted its ability to conduct business.

I suspect that a massive number of short-sellers have caused some of yesterday's stock capitulation. This means that we could see a short squeeze sometime soon when the sellers buy back shares to flatten their positions. I would be very apprehensive about touching NKLA in any capacity.

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