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Bear Of The Day: Nikola (NKLA)

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Nikola (NKLA - Free Report) bulls have gotten their face ripped off these past few months, with the start-up's survival being put into question. Since NKLA's ostentatious rally out of the public market gates in early June, the share price has plummeted over 80%.

Following Hindenburg Research's (appropriately named) strongly-worded report about Nikola misleading investors, "Tesla Wannabe's" CEO, Trevor Milton, stepped down on September 21st.

This 'tactical' move by Nikola almost felt 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 Hindenburg Research's stock crushing report, NKLA has capitulated 57%, likely blowing out many retail investing bulls' trading accounts. This stock looks to be headed further into the depth of negative returns. Unless its new leadership can change the narrative on this pipe dream of a company, it will not survive much longer.

Analysts have been increasingly pessimistic about this company's future, dropping their long-term estimates and pushing NKLA into a Zacks Rank #5 (Strong Sell).

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.

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

Apprehension From The Beginning

I had been very apprehensive about NLKA shares since they surged past Ford's valuation. How can a company that hasn't sold a single car be 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 over optimism in the equity markets.

These SPACs seem to be a cesspool for overzealous retail investors, 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 has recently fallen off its high horse after hitting insane valuations. DKNG has dived 45% since it peaked a month ago.

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.

Nikola may happen to come out of the ashes of this disastrous start in the public market. The business is yet to even display a functional vehicle, and with its partnerships looking to be in shambles, I would not risk an investment in NKLA.

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