Nikola Motors: How Trevor Milton Built and Destroyed a $30B Company
Notes:
- Not investment advice (do I have to say that?)
- Since Trevor’s Twitter account was deleted at the time of this post, I retrieved screenshots of his tweets from mirror sites, so the included tweet timestamps and engagement numbers are out-of-date.
Background: A Synopsis of Nikola’s Wild Year 📈📉
Nikola Motors is a company based in Phoenix, AZ, which primarily aims to produce electric and hydrogen-powered semi-trucks. They haven’t produced any production vehicles yet, but drew the attention of retail investors and media in 2020 as they went public via SPAC. Riding a wave of EV stock hype, their market cap skyrocketed after their debut. Their founder and Executive Chairman, Trevor Milton, became popular on social media and via interviews, promoting Nikola’s stock and sharing disinformation about Nikola’s technological progress and business achievements. The ensuing downfall was highly publicized, as fraudulent claims from Trevor and his company came to light, resulting in Trevor’s eventual resignation. On the surface, Nikola’s rise and fall bear a strong resemblance to that of Theranos or startup hype during other boom-and-bust cycle, but Nikola’s story feels uniquely placed in the 2020s: a CEO obsessed with (and empowered by) social media, retail investors made vulnerable by a newly-gamified stock market, and the rise of cult personalities like Elon Musk and Donald Trump.
Boom and bust: the Nikola timeline
March 2020: Nikola announces plans to go public via a SPAC merger, at a valuation of $3.3B. The SPAC (VectorIQ) began to gain a following of retail investors, many of whom were drawn into the space after the recent EV boom.
June 2020: Nikola’s share price peaked at $80, representing a market cap of over $30B. This was nearly unheard of for a pre-revenue company, and exceeded Ford’s market cap.
September 9, 2020: GM and Nikola announced a partnership, in which GM would take an 11% stake in Nikola in exchange for supplying the technology for production of the Nikola Badger, a Hydrogen/Electric pickup truck Nikola had designed, but had not made much progress building. Many Nikola investors saw this as a confirmation of the Nikola’s legitimacy and progress towards getting vehicles productionized and on the market.
September 10, 2020: Hindenburg Research releases a thorough and damning report containing ~20 allegations of misleading statements by the company and Trevor Milton. These allegations brought the value Nikola’s intellectual property into question, and showed the company had made very little progress into productionizing a hydrogen semi-truck. The report clearly implicated Trevor as a delusional liar.
One of the most hilarious allegations: A truck highlighted in one of Nikola’s key promotional videos was proven to be simply rolling down a hill, rather than driving under its own propulsion, as one would assume.
Perhaps the most damaging allegation for Nikola’s valuation: The truck order numbers used to calculate future revenue did not require verification of identity OR payment. For example, any layperson could go on Nikola’s website and “order” 1000 Nikola Semis. Nikola used these orders as “committed future revenue” in investor materials.
September 21, 2020: Trevor Milton is forced out, stepping down from his role as Executive Chairman, just one week after calling the Hindenburg allegations “a hit job” and “lies”. He left with over $1B in Nikola equity and deleted his Twitter account.
November 10, 2020: Nikola announced that the company and Trevor Milton were under investigation by the SEC and the DOJ.
November 30, 2020: GM backed out of their original deal with Nikola and agreed to a much smaller deal, simply allowing Nikola to buy parts from GM.
The man, the myth, the market manipulator: Who is Trevor Milton?
Nikola’s founder and former Board Chairman and CEO, Trevor Milton, was a rare personality among public company leaders. Trevor’s politics, social media engagement, and frequently-misleading claims enabled him to become idolized by many retail investors.
Anti-establishment conservative
Though frequent engagement on Twitter and Instagram, Trevor appealed to retail investors wary of Wall Street, Silicon Valley, and other liberal institutions of power. Trevor found a niche among cult CEO personalities by framing himself as a down-to-earth, religious, family man who became wildly successful due to his incredible drive and intelligence. His relative conservatism also played well with truck drivers, who make up ~1% of the US population. Truck drivers were drawn to Trevor’s politics, personality, and pandering, and were captivated by Nikola’s stunning renderings of the next-gen trucks they planned to popularize.
Unfortunately, much of Trevor’s political and philosophical commentary was offered on Instagram Live, or in Twitter replies that have since been deleted, so I am unable to provide many direct quotes.
Extraordinary salesman
Trevor spoke to his followers & investors as part of the “Nikola family”, rather than logical actors with investment strategies and critical thinking skills. Trevor frequently used social media platforms to encourage the purchase of Nikola shares, even advertising the stock’s ticker in his Twitter bio (“NASDAQ listed: $NKLA”). He successfully portrayed himself as simply wanting retail investors to share in his success. His brazen optimism was exciting for his retail investors, many new to investing in stocks.
Angry boy
If haters gonna hate, Trevor’s gonna hate back. Trevor engaged his critics frequently and publicly, often taking criticism personally and responding with ad hominem attacks. He called nay-sayers “trolls” and “haters”. He posted angry replies to Tweets criticizing the company’s prospects. He responded to emails from critics in a weekly Instagram Live segment he called “Trolls with Trevor”. During one “Trolls with Trevor” I watched live, he cried while responding to an email he had received.
Liar and fraudster:
Trevor regularly used deceptive and misleading comments to further his agenda and hype up Nikola. When Twitter users called him out on misleading numbers or assumptions, he blocked them or responded with comments like “I’m not allowed to say more about this. I wish I could, but trust me—this will be huge”. The Hindenburg report compiled many great examples of Trevor’s tendencies to lie and deceive.
Takeaways
What can we learn from Nikola’s story?
1. Retail investors now have massive market influence
Due to the recent popularization of retail investing, public companies don’t need financially-literate Wall Street/Silicon Valley money to pump their share price higher. Especially for companies with small market caps, retail investors can now have massive influence on company share prices. We’ve seen this more recently with GME, AMC, etc.
Public float: For a company with a large market cap like Nikola at its peak, retail buying pressure can still cause massive share price upswings when the public float is relatively small. “Public float” is the number of shares that are not locked up, and thus are available to trade in the market. In June of 2020, Nikola’s public float was only 23M shares. At $30 per share, Nikola only had ~$700M worth of shares in public float (compared to their $20B+ valuation at the time). Due to Nikola’s large retail following, retail investors were capable of pushing the price up and keeping it lofty, despite a lack of institutional support.
2. Retail investor frenzy can create a flywheel effect that drives share prices into the stratosphere.
Retail investors are more likely to believe that if a share price goes up, it will continue to go up, and are thus more likely to buy stocks that have been performing well. Stocks that are doing well also receive more attention, which brings additional retail investor interest and funds to fuel the cycle.
- Robinhood’s “100 Most Popular” list is a popular source of investing ideas for new investors. When a large percentage of Robinhood users are trading a certain stock, the stock will be added to this list. Companies whose share prices have recently popped will often end up on the list, which can then lead to higher prices and solidifying the stock’s popularity. Nikola was still on the “100 Most Popular” list in March 2021, even after dropping more than 80% from its peak last June. The increased visibility that Robinhood gave Nikola pushed their share price higher during the company’s rise in early 2020, and likely slowed its fall in the months following.
- Public forums (e.g. r/WallStreetBets, FB groups, Discord servers) are teeming with retail investors promoting their latest stock picks. When one stock becomes somewhat popular, the price can rise, leading to increased investor confidence, and a cycle of promotion from new investors and further increases in price.
These compounding effects can result in incredible discrepancies between market caps and what a company would be valued at using traditional (aka somewhat reasonable) models. They also represent great opportunities to bet against these stocks — the challenge is guessing when the positive reinforcement cycle will break.
3. Cult-followings of company leadership do influence a company’s share price and brand, for better or for worse
Trevor was an idol to many of Nikola’s retail investors. His popularity fueled new retail investment, which sent the share price soaring, and kept it high, even after the Hindenburg report. He did this by keeping an active social media presence, and interacting directly and regularly with retail investors.
In addition to influencing the share price, Trevor’s cult following also led the public to associate Trevor’s personality and politics with Nikola as a company. Potential investors heard about the company through Trevor’s tweets and media appearances and thus associated the company with his conservatism, directness, optimism, brazenness, pride, etc. These values on public display built a community of like-minded investors, who further reified Nikola’s brand within their own circles.
Though Nikola ended up self-destructing, I believe some of Trevor’s tactics are worth consideration as valid tools to more sustainably buoy share prices at legitimate companies. We’ve seen varying degrees of cult-like followings of public company leadership: Elon Musk, Bill Gates, Mark Zuckerberg, Jeff Bezos, etc. Company leaders give retail investors a face and personality to latch onto, which can improve retail investor confidence, and even, in Trevor and Elon’s case, go so far as to create a small unpaid army of defenders, customers, and advertisers.
In addition to the impact on share price, I’m fascinated by the ways in which cult personality figures can influence a company’s brand, associating the brand with the personality and politics of its leader. Some examples:
- The legacy of Steve Jobs as a genius, troubled innovator has given the public the perception that Apple is intense, mysterious, innovative, and values design above all. Without Steve Jobs’ famed reputation, would we associate Apple so strongly with these ideas? Would we value their products as highly?
- Mark Zuckerberg’s meme-ified reputation as a humanoid robot solidifies retail investors’ perception of Facebook as a heartless company that uses ~evil algorithms~.
- Elon Musk’s openly libertarian, capitalist, and futurist ideals associate Tesla with those same ideas. Imagine if Tesla were led by Bill Gates (Elon didn’t found Tesla, btw). Would you think of the company the same way? Would you think of a Tesla car the same way? There’s a large Twitter community of Tesla fans, obsessed with Elon, who spend considerable time and energy attacking his critics (e.g. Bernie Sanders). They promote Tesla, make 420 jokes 🍁, and echo Elon’s complaints about everything from California, wokeness, and taxes. Elon’s personality has massively influenced Tesla’s investor and customer base, and these new investors and customers further create an association between Tesla’s brand and Elon’s ideals.
I believe we’ll see this trend continue in the future, as leaders’ personalities and politics become inextricably linked with their company’s reputation and brand. If a CEO with a following can have a tremendous impact on a company’s market cap — why wouldn’t a company use that to their advantage?
4. We have an opportunity to improve SEC regulation and enforcement, to prevent companies from deceiving vulnerable investors.
The Nikola story is enthralling, but tragic. Many new, low-income investors lost a significant portion of their savings. How can we protect these investors, without restricting them? I believe we need to do more to protect retail investors.
I don’t have much context on existing regulations, so I’m not sure whether we need to tighten regulation, or if existing regulations simply need to be enforced. However, I am confident that the CEO of a pre-revenue company should not be able to promote their company’s NYSE ticker on Twitter, make misleading claims about the business, and then leave with billions of dollars and few consequences.
In Nikola’s case, the SEC should have gotten involved earlier than they did, but I think it’s likely that additional regulation would be helpful in reducing public harm for risky investments that operate like a pyramid scheme. Here are some ideas:
- Robinhood shouldn’t be promoting “hot” stocks to new investors, since this just keeps hot stocks hot, and leads to less-informed investors piling onto stocks with already inflated valuations.
- A company shouldn’t be able to promote “future revenue” that isn’t contractually locked down. This would have prevented Nikola from claiming that they had billions in future revenue.
- Company leadership shouldn’t be allowed to promote a stock ticker on social media! Has picking stocks based on advertisement Tweets from founders ever been a viable investment strategy?
5. Maybe… not everyone should play the stock market
Anecdotally, many of the people who lost money investing in Nikola did not understand how to evaluate investment opportunities. Most of them saw beautiful CAD renderings, a passionate leader, and were sold — not once considering what the company should be worth. Unfortunately, many of Nikola’s investors couldn’t afford to lose as much money as they did. As retail investing becomes increasingly popular, it seems to be increasingly common to gamble a significant percentage of one’s life savings in the stock market.
The barrier to entry for retail investing is basically 0, due to the recent popularization of fractional shares, low minimum balances, commission-free trading, and user-friendly/gamified investing apps. With no barrier to entry and so many cases of retail investors advertising their success (and likely not advertising failures), we leave retail investors vulnerable to serious consequences.
Is it useful for our society to have amateur investors spending hours each day trading on Robinhood? Probably not. What should we do to stop it? I don’t know. Waiting for the next bear market to destroy investors’ confidence and deplete their life savings doesn’t seem like a great solution.
I believe there’s an opportunity to encourage individuals to not gamble their life savings on Robinhood, or at least maintain a diversified gambling portfolio. How do we do that? PSA billboards and online ads? Adding investing literacy as mandatory high school curriculum? I’m not sure. But professional players will always have an advantage in the markets — pretending otherwise only hurts vulnerable investors.
