Nikola Motors, A Rumored Fraud, Peloton, Spotify and A Trailblazing New CEO at Citigroup

Nikola’s stock slides on fraud allegations, Peloton soars to pandemic-driven profits and new Citigroup CEO Jane Fraser prepares to cross a significant milestone.
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Good morning! Today’s word count is 1,786 words, or an 8-minute read. Let’s get to it:

“The Dow and S&P 500 rose, signaling that an unsteady week on Wall Street might end on a firmer footing after swings in highflying tech stocks injected volatility into the broad market,” WSJ writes.

  • S&P 500: $3,360.31
  • Nasdaq: $10,999.74
  • Bitcoin: $10,360.37
  • U.S. 10-Year: 0.674%

Justin Oh’s Quick Read

A common topic we discussed on last night’s YouTube Live Show was “should we sell our Peloton ($PTON) stock” now that it has rallied over 50 percent since I strongly recommended it. Last night, I said I was trimming my position and taking profits, which I had started to do. Still, after looking at my valuation model this morning, even at $90 per share, $PTON is trading at around 20x my estimates of EBITDA in 3 years, which is still pretty reasonable, especially if they keep outperforming. But after rallying, it isn’t what I would call “cheap.” Even though I’m shedding about 20 percent of my $PTON because I was heavily invested, I think it makes sense to keep it as a 4-7 percent position, alongside Spotify ($SPOT) as it relates to the ROIC Big Board.

Nikola Stock Falls on Fraud Allegations

Maybe Nikola Motors and its crazy hype is too good to be true after all. Notable short-seller Hindenburg Research published a lengthy report Thursday detailing a list of problems it has with Nikola. The report doesn’t pull any punches, calling Nikola an “intricate fraud built on dozens of lies over the course of its Founder and Executive Chairman Trevor Milton’s career.” At its core, it focuses on the electric vehicle company overstating the development and capabilities of its batteries and fuel cells.

Why It Matters 

Just a few months ago, Nikola was viewed as possibly the next Tesla.

  • The company’s name has floated around the automotive industry for years, promising to change the world with its groundbreaking fuel cell and electric vehicle technology.
  • Even amid the drama, Nikola’s stock is still up roughly 230 percent since it announced plans to go public by SPAC in early March.
  • Earlier this week, General Motors and Nikola announced a landmark $2 billion partnership, which sent Nikola’s stock soaring nearly 50 percent.

But Hindenburg alleges its all been a sham.

  • In the report, Hindenburg said it found “extensive evidence,” including recorded phone calls, text messages and private emails that suggest Milton has made “dozens of false statements” over the years.
  • The research firm alleged Nikola engaged in several deceptive practices such as overhyping the capabilities of its electric semi-truck and filling its multibillion-dollar order book “with fluff,” also pointing to crucial partners and backers “cashing out aggressively.”
  • Hindenburg also said Tesla’s ongoing success “pressured” GM to make a deal with Nikola to increase its exposure in the electric-vehicle industry.

Investors got spooked, and Milton wasn’t pleased with the claims.

  • After announcing its agreement with GM, Nikola’s market cap surpassed $20 billion.
  • In the past two days, the stock has dropped 26 percent, while GM’s stock fell 5.5 percent after publicly issuing support for Nikola.
  • The Nikola CEO took to Twitter to call the allegations “false” and the whole situation a “ hit job,” a response reminiscent of Elon Musk, who, despite being the head of a public company, has never been shy to take to Twitter and say questionable things.

But there are conflicting factors at play.

  • Hindenburg, which notes on its website that its work has prompted executive resignations and SEC investigations, is short on Nikola’s stock, meaning Hindenburg profits if share prices go down.
  • Wall Street has praised Nikola’s agreement with GM, writing that it “validated [the electric vehicle maker’s] business strategy and made its stock less risky.”

Numbers To Consider

  • GM expects to receive more than $4 billion in “perks” (manufacturing fees from the Badger, batteries and fuel cells) from its partnership with Nikola.
  • Nikola unveiled its Badger truck in February, started taking pre-orders in June, and expects to begin production by the end of 2022.

Justin Oh’s Two Cents

I have made so much content about how Nikola is stratospherically overpriced and how the product’s value proposition doesn’t even sound plausible. I even did an interview with a truck leasing expert on YouTube, which you should watch if you’re still interested in this saga. I’ll leave you with two classic adages. The first is “if it sounds too good to be true, it usually is.” When I see a hype man that’s a slick talker but inconsistent with the numbers or true business rigor, I get very skeptical. The second is “where there’s smoke; there’s fire.” When we see rumors or reports of wrongdoing, inconsistencies, fraud, or exaggeration, it doesn’t always mean the allegations are true. But when there are accusatory claims, especially multiple, it usually means there’s a fire there, and I don’t want to be caught in it. Hopefully, you all saw me personally calling out Nikola’s smelly smoke back in May.

Read More: (THE INFORMATION)

Number Crunch: Peloton Posts First-Ever Profit as Pandemic Speeds Sales

“Peloton Interactive Inc. posted its first-ever quarterly profit as revenue nearly tripled, capitalizing on surging demand for at-home fitness gear during the coronavirus pandemic,” WSJ writes.

  1. The at-home fitness bicycle maker announced its total user base of remote fitness subscribers reached around 1.1 million in the quarter ending June 30. It was 886,100 at the end of March.
  2. The company’s total revenue was $607.1 million for the fiscal fourth quarter ending June 30, a notable increase from $223.3 million last year. It earned a profit of $89.1 million after recording a $47.4 million loss in the year-earlier quarter.
  3. Peloton projects subscriptions could almost double in fiscal year 2021, and fall somewhere between 2.05 million and 2.10 million. Total revenue is projected to run as high as $3.65 billion, around double the 2020 mark.
  4. The company is planning to broaden its appeal by cutting its base stationary bike to $1,895, a $350 drop. With lower prices, Peloton is betting on new customers’ willingness to shell out $39-a-month for its growing content library.
  5. Peloton’s shares reached $96 after hours on Thursday and have more than tripled on the year.

Justin Oh’s Two Cents

My estimates for Peloton’s ($PTON) earnings were much higher than Wall Street’s, and they still handily beat them. They reported a 4.5 percent higher revenue than I expected. But the biggest surprise is that they posted a positive EBITDA of $118 million and are now very profitable. It’s clear that they have a crazy amount of momentum and room for growth. I’m very encouraged by Peloton’s hardware price drops because I believe this business’s real value lies with the subscription revenues attached to the amount of Peloton’s being used in the world. So the more bikes and treads they have out there, the more they’ll grow subscription software profits.

Read More: (WALL STREET JOURNAL)

Worth Your Time

New Frontier: Jane Fraser is about to cross a significant milestone. When she ascends to Citigroup’s chief executive role in February, she will become the first woman to lead a major financial institution in the United States. Fraser is more than qualified for the job — she’s been at Citi for 16 years and runs its biggest global division. But Fraser’s ascension is “groundbreaking on Wall Street, which has never quite shaken off its longstanding reputation as a boys club, with men dominating the upper ranks of banks and other financial firms, despite efforts to recruit and promote more women.” (NEW YORK TIMES)

Low Rate World: “The U.S. government is paying less as it borrows more, one reason investors appear more comfortable than Congress about funding another leg of stimulus. Interest payments in the federal budget declined about 10 percent in the first 11 months of this fiscal year, when America was running up its biggest deficit since World War II. Over the next few years, servicing the national debt will be cheaper than any time in the past half-century when measured against the size of the economy, according to the Congressional Budget Office.” (BLOOMBERG)

Unintended Consequences: While China’s new technology export restrictions originally served as a way to give Beijing a say in any potential TikTok deal, the future implications could “upset a broad range of industries.” U.S. companies with research labs in China, such as Microsoft’s Beijing-based research arm or Zoom’s R&D operations, are now in a challenging position where they may have to spin off their Chinese operations. (REUTERS)

Fair Fight: “Google and Twitter said they are taking additional steps to tamp down misinformation about the U.S. election, as tech platforms scramble to address an expected flood of false claims and misleading posts ahead of the November vote. In separate announcements on Thursday, Twitter said it plans to more aggressively label or remove election-related tweets that include disputed or misleading information, while Google said it would screen more auto-complete suggestions to avoid voters being misled.” (WALL STREET JOURNAL)

Ain’t Having It: “Facebook is appealing a preliminary order by Ireland’s privacy regulator to suspend its data transfers from Europe to the U.S., pushing its stance in a case with wide-ranging implications for global tech businesses…The appeal comes after The Wall Street Journal on Wednesday first reported that Ireland’s Data Protection Commission had informed Facebook in a preliminary decision that it expects to order the suspension of the company’s transfers of personal information about EU users to Facebook’s servers in the U.S.” (WALL STREET JOURNAL)

Tidbits

President Trump said he has no plans to extend the TikTok sale timeline, as ByteDance and interest parties, Microsoft-Walmart and Oracle, close in on the impending Sept. 20 deadline.

Oracle’s $9.37 billion in sales surpassed Wall Street’s expectations, finding growth in cloud-computing as the company tries to remake itself.

“Kroger Co. posted higher quarterly sales from the pandemic-driven demand for groceries but signaled that growth has slowed from the first months of the crisis.”

Massively popular video game streamer Tyler “Ninja” Blevins announced he was returning to stream exclusively on Twitch, the Amazon-owned video game streaming platform.

This week, China approved Phase I human testing for a nasal spray Covid-19 vaccine developed by a joint research effort between Xiamen University, Hong Kong University and Beijing Wantai Biological Pharmacy Enterprise Co.

“A Chinese pharmaceutical company has injected hundreds of thousands of people with experimental Covid-19 vaccines, as its Western counterparts warn against administering mass vaccinations before rigorous scientific studies are complete.”

Venture-backed real estate firm Opendoor, which could be valued as high as $5 billion, is in advanced discussions to go public by a SPAC merger.

Multinational banking giant Santander announced its $400 million venture capital arm, re-branded as Mouro Capital, will be spun out and managed autonomously.

EBay founder Pierre Omidyar has stepped down as part of a broader overhaul to the company’s board.

A Couple Cents Featured

Catch up on last night’s YouTube Live Show, where Justin Oh discusses the tech selloff and whether it’s time to start unloading stocks.

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