Electric\fuel cell truck manufacturer Nikola Corp (NKLA) went public after a reverse merger with special purpose acquisition corporation (SPAC) VectorIQ. NKLA’s stock price rose to its June high of $79.73, +188%, after the merger and has since given back -22% to $62.14 in morning trading. NKLA’s market cap has skyrocketed to just below Ford’s (F) even though the company will have no revenues in 2020 ($1 billion projected in 2023) versus Ford with $115 billion of revenues in 2020. Nikola outsources its production to CNH Industrial (CNHI) and is producing heavy duty semi-trucks, the Nikola One and Two, and expecting to begin delivery of the Nikola Tre in 2023 with pre-orders already topping $10 billion. Nikola’s zero emissions pickup truck, the Badger, will begin to take reservations in late June.
NKLA is already the 6th largest short in the domestic Auto Manufacturing Sector with $526 million of short interest, 5.26% of its float. Stock borrow costs on existing short positions is 243.57% annualized fee with rates topping 600% fee in today’s trading. The expensive stock borrow rates are a function of both heightened short selling demand and limited lending supply. NKLA’s sudden price surge after its reverse merger and its lack of near term sales has signaled it to be an overbought stock in the eyes of short sellers increasing demand on the short side.
NKLA’s lack of supply has two main drivers, lack of institutional long shareholders and large amount of insider shareholders. NKLA is a largely held\traded retail stock and there is less stock in institutional hands which are generally the primary lenders and source of rehypothicated stock which supplies the stock loan market. Insiders, WI Ventures, Vecto IQ Holding, CNH Industrials and Worthington Industries are large shareholders who are not lending their shares.
Shorts in the Auto Manufacturing Sector have not fared well in June, down -$2.58 billion in mark-to-market losses (down -$960 million ex\Tesla). NKLA shorts took the brunt of the losses on a percentage basis, down -72% for the month and are already down almost a quarter $billion for the month. Electric car manufacturers (TSLA, NIO & NKLA) were down -$2.16 billion in month-to-date mark-to-market losses, 84% of the sector’s month-to-date losses.
With significant mark-to-market losses and sky rocketing stock borrow fees NKLA is prime target for a short squeeze. NKLA shorts have already paid -$22 million of stock borrow costs in June and are paying -$3.6 million/day at present rates so another spike in its stock price should shake out short sellers with shorter term profit\loss horizons. The lack of stock borrow supply has throttled any chance short sellers to build their position and create negative stock price pressure in the stock. And finally, we are seeing stock borrow recalls hitting the street, forcing some shorts to buy-to-cover and close their positions as there is no stock borrow supply available to replace those recalled stock borrows.
In summary, there will be no NKLA short selling in size to push stock prices down, in fact forced buy-to-covers due to recalls will begin to drive prices up. If NKLA’s stock price continues to trend upwards we should expect a short squeeze in the stock with additional upwards price pressure supplied by shorts who are covering their stock and cutting their losses. High stock borrow costs are offsetting slight price moves downward and shorts need big moves downward in order to generate net-of-financing mark-to-market profits. A large proportion of the long shareholders are retail investors, the stock lending pool will not grow substantially in the short term and therefore rates should stay expensive in the short term and possible over a long period of time further discouraging new short sellers from getting into the trade. It seems like the prevailing winds are favoring the NKLA long shareholders more than the shorts at this time.
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