Tesla May Have A Nikola Problem

Nikola shares jumped almost twice as much as Tesla’s fell yesterday, but let’s not kid ourselves, these companies are still miles apart.

Sept. 9, 2020

In what has become the worst single-day performance in its history, Tesla (NASDAQ: TSLA) shares fell 21% on Tuesday after the company was snubbed by the S&P 500 committee in favor of Etsy. This contrasts with Tesla’s up-and-coming rival Nikola (NASDAQ: NKLA), which saw its share price soar 40% yesterday after General Motors (NYSE: GM) took a stake in the firm. 

Is S&P 500 membership really so important?

There can be a number of benefits for a company that gets included in the S&P 500 or any major index: 

  • More stock getting purchased by ETFs that track the index. 
  • Gaining a wider following from inclusion in the most-tracked index in the world. 
  • A reduction in volatility as index funds’ don’t frequently buy and sell the stocks they own. 
  • It also does have an element of prestige to be included. 

So, why was Tesla excluded? 

Despite finally being eligible for inclusion following its fourth consecutive quarter of posting a profit, the company’s reliance on selling regulatory credits to other carmakers may be the source of its exclusion. The company’s $483 million of pre-tax profits in the first half of this year relied on $782 million from just such sales.

Is Nikola a threat to Tesla? 

That would be a stretch, but there’s no denying that the electric truck maker pulled off a shrewd deal in selling off a $2 billion equity stake to General Motors, sending shares up 40.8% on Tuesday. The company, which is often mocked for not actually building any cars, now has one of the largest carmakers in the U.S. on its side. 

The Phoenix-based Nikola said in a filing with the Securities and Exchange Commission (SEC) that it entered into a subscription agreement last Thursday in which it will issue and sell 47.7 million shares of common stock to GM. The deal is valued at $2 billion based on a stock price of $41.93, which was 16.1% above Thursday’s closing price of $36.13, but 16.2% below Tuesday’s closing price of $50.05. 

“You couldn’t dream of a better partnership than this,” said Nikola Founder and Executive Chairman Trevor Milton. “By joining together, we get access to their validated parts for all of our programs, General Motors’ Ultium battery technology and a multibillion-dollar fuel cell program ready for production.”

Tesla might still be the biggest fish in the pond, but when the little fish begin joining forces, suddenly they become a far less negligible threat.

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