In this episode of Industry Focus: Energy, Nick Sciple chats with Motley Fool senior auto analyst John Rosevear about the auto industry, particularly electric and fuel cell technology. They discuss a recently public company. Find out about its technological innovations, how it's positioned in the marketplace, and much more.

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This video was recorded on June 11, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple, joining me today is Motley Fool senior auto analyst John Rosevear. John, great to have you back on the show.

John Rosevear: Great to be here, Nick.

Sciple: So, it's been a while since I've talked to you on the podcast, it's [laughs] certainly been a crazy year for all industries, I know you pay close attention to the autos. Can you, kind of, give us a summary, since the last time we had you on, what has happened across the auto industry?

Rosevear: Well, OK, without focusing on our favorite electric truck maker here. Well, everybody closed their factories in March and they have been reopening in stages since about the middle of May. What we're starting to see in the market is that pickup truck sales stayed surprisingly resilient through the shutdowns, through April, through May, meaning that dealers are now in short supply. So, GM, Ford and Fiat Chrysler are ramping as quickly as they can while keeping worker safety in mind, because the coronavirus is still out there, to try to get as many pickups as they can to dealers.

For them, this is a good and profitable situation; pickups are profitable, the mix is profitable. Incentives right now are not terribly high. I think there's some pent-up demand that's going to be filled, where things go later in the year, if we get to the point where auto factories are consistently evolving while adjusting to recession, I don't know when we start to see year-over-year declines in months August, September, October, but right now, the next couple of months, things are looking better than I think we all expected two, three months ago. Ford had forecast a huge loss for the second quarter and things may not be that bad. I don't think they'll be great, but certainly everybody is trying to ship as many high profit products as they can before the end of June.

And buyers are coming back, from what I'm hearing. You know, used car prices have been very strong suggesting that people are buying cars of some kind. And I think, again, for the near term, we're going to see good strength there.

Sciple: So, you talk about used car prices. One of the other big stories, kind of adjacent to autos that's been in the news, has been this Hertz bankruptcy and this idea that perhaps they might have to liquidate a large number of their vehicles. Do you think that could impact the broader auto market at all?

Rosevear: Not to any meaningful degree. I mean, sure, but I think if they have to dump their cars, the cars will get absorbed. Yeah, I think demand is really strong. I think the "Oh, my God! We're in for used-car Armageddon here!" is way overblown, I don't think it's going to go that way anymore. Consumers are buying. And we may see people who have previously relied on public transportation maybe not do that for a while, maybe not invest in a new car, but pick up a used car to drive to work until all of this passes. Yeah, I think that's very possible.

Sciple: Yeah. And so, at least so far this year demand is better than expected given the crazy disruptions we've seen in the market.

Rosevear: Oh, yeah. I think back in March when we saw the factories closing, they were like nobody is consolidating as far as the second quarter. And you know, U.S. auto sales were down by roughly half in April, that's bad, but it's still an awful lot of cars and trucks got sold at a time when none of the manufacturers were shipping to dealers, so inventories came down leading to May and really shipments didn't really start up until the second-half of May. And even then, factories ramping up slowly, GM's pickup plants are up to full speed. Ford expects everything to be up to full speed or at least pre-pandemic levels by, I think they said, the first of week of July. Fiat Chrysler is in a similar position. So, yeah, new cars and trucks are coming to dealers, there seems to be demand for pickups, at least. We'll sort of see how the second quarter numbers look once we get into July, and then we'll have a better read about what's really going out there. But it looks, you know, it's not great, but it's better than everyone thought it would be.

Sciple: So, moving on from the auto market and more broadly, I want to go to our main story we want to talk about today, which is, Nikola (NKLA 0.88%) Motor has gotten a lot of attention, finally completed its SPAC [Special Purpose Acquisition Company] acquisition and officially came public last Thursday under the ticker NKLA. What can you tell us about Nikola high-level for so far?

Rosevear: OK. Their core thing is electric Class 8 trucks, these are tractor-trailers. And they've been developing two parallel tracks hydrogen fuel cell driveline for heavy trucks as well as a battery electric driveline based around, they claim to have an innovative battery that delivers more power with less weight; it's the key innovation there.

They had raised a fair bit of money beforehand. They have a partnership with a big European tractor-trailer maker, their trucks are going to be based on that company's, IVECO's architecture. They had about $230 million in the bank before this deal, which netted them, I forget, something like $600 million. They have a bunch of reservations, we all know that there's no cash deposit required for a reservation, but they do have some big names in there. And they are negotiating with companies; like, Anheuser-Busch InBev has signed up to buy several hundred of their trucks for instance. There are some other fleet operators, sizable orders in their reservation book that they're working to converting to cash deposits.

Sciple: Yeah. And so, as it is today, the company does not have production under way, and it's really, kind of, some prototype vehicles with the prospect to develop a factory, etc.

Rosevear: Yeah, I mean, their plan is to build a factory in Arizona with help from IVECO. CNH Industrial is the parent company, the stock is CNHI, IVECO is the truck making subsidiary. IVECO is an Italian company controlled by the Agnelli family, the family that founded Fiat. So, it's in some ways a sibling of Fiat Chrysler automobiles and the Ferrari. So, I mean, it's a well-capitalized company, it's an established company and so forth.

They have a fairly new Class 8 semi architecture that as part of this partnership deal that Nikola has struck with them, Nikola will license that. The plan is to build, sort of, the first prototypes of the truck, the first production prototypes at an IVECO plant in Germany, I think. And then to start production at their own factory in Arizona, which, now that they've raised money, they can begin building by the second-half of next year.

The initial truck will be the battery electric truck, the fuel cell truck follows in two years. In parallel, they are building up a hydrogen fuel refueling network, away from Tesla's supercharging strategy, you know, when Tesla first started selling cars, people said, well, where will we recharge? And Tesla said, well, we have an answer to that, we're building high-speed chargers around the country. Nikola is doing essentially the same thing, if you can think of refueling a hydrogen fuel cell truck as recharging, they're building, you know, charging stations for these around the country. In a couple of years, they will have a reasonable network setup along major routes, and that's when they plan to launch the fuel cell truck.

Sciple: Yeah. John, I want to, kind of, go into the partnership aspect of what you mentioned earlier, CNH Industrial. This is something, when you look at their presentations when management speaks, they make a big deal about the importance of their partnerships to their strategy. Why are partnerships so important to them and maybe for any automaker, more broadly?

Rosevear: Because it takes a ton of money and time and resources to develop a vehicle. You know, by partnering with CNH, they don't have to design the rest of the truck, they don't have to do any of that, what they have to do is focus on what they do best, which is, you know, these powertrains, you know, these electric powertrains. And fit them to this existing architecture that was already engineered, that was already optimized for mass production to the extent that IVECO does that and so forth. It saves them a lot of time and a lot of money. I mean, to develop it from scratch, they'd have to hire hundreds of engineers and it would take them, I don't know, two, three or four years. And so, that is a huge advantage for them.

They will build some of these trucks in Europe via a joint venture with CNH later on, but the North American production is all theirs, using this design, but they pay a licensing fee for the design presumably, but the special sauce, the electric drivetrain and software and so forth, it's all theirs.

Sciple: And so, I guess the drivetrain and the software is Nikolas, and then the kind of shell that that goes into is CNH's, is that what I'm understanding?

Rosevear: Yeah. I mean, I'd say, you know, the frame, the cab and so forth like that, what are the trucky truck parts. [laughs] And that kind of stuff, you know, it looks like no big deal, maybe, to some of us; how hard can it be to manufacture tractor-trailers? Well, to meet regulations all over the world to optimize the traditional diesel business fuel economy and so forth, safety regulations and so forth, durability and all that. That takes a lot of engineering and a lot of knowledge and a lot of time. That is something that Nikola, via this partnership, won't have to duplicate on its upcoming trucks. So, you know, it's huge.

Sciple: So, when we look at the market opportunity for Nikola, you know, what is the impetus for customers to come to Nikola versus traditional truck-makers and what's the opportunity for them to grow as there's this push to maybe more green trucking?

Rosevear: Well, I mean, the promise, you know, the selling case is that, the total cost of ownership will be lower. And if you're burning hydrogen, hydrogen is cheap, Nikola's plan, I think, is to lease the trucks and make fueling at their stations free. It's hard to argue with that if you're operating a fleet of 800 big rigs, [laughs] you know, you don't have to buy diesel anymore, with hydrogen refueling you don't have to wait hours and hours to recharge these trucks. They can pull in, be off for 15, 20 minutes while they refuel, driver gets a cup of coffee and a sandwich and it's back on the road. So, that sort of thing.

You know, if the reliability is there, if the durability is there, total cost of ownership could look very good on this. Plus, it's zero emissions and they get to say it's zero emissions. And there are some marketing spin that can go with that, you know, our trucks are electric now, for some companies being able to say that is important; our environmental impact comes down, because our delivery fleet isn't burning diesel fuel anymore. The emissions from a hydrogen fuel cell, it's water vapor and it's clean, you know, if they can capture it and drink it, [laughs], you know, there's no smoke, there's no smog, there's no CO2.

Sciple: Yeah. And following up along the sides of emissions, Nikola is touting a plan to use renewable energy to generate the hydrogen that will refuel the truck, so that from all the way through the supply chain, the fuel is being generated in a green way. This is similar to what Tesla had said they would do in the past when it comes to powering all their superchargers via solar. When you look at this plan, what do you make of it?

Rosevear: Well, we're a little out of my expertise here, there are people who know a lot more about hydrogen manufacturing than I do. But they tell me that it's going to be a long time before the supply chain is really green. You know, to the extent that Nikola makes efforts and investments in that direction, that's a net boon, but don't expect it to be 100% green tomorrow, just as Tesla's electric supercharging system isn't 100% green right now either. In fact, when they have trouble sometimes they're using diesel-generated power in the superchargers, which is, you know, I mean on the one hand, it's terrible, on the other hand it's what they got to do to keep their customers on the road, and that's one right there. You know, it's not a purely green chain yet. Is it better? Sure, you know, because the emissions from the trucks are down, you know, making diesel fuel and gasoline has its own [...] cost. What's the balance? How much better? I don't know off hand.

Sciple: OK, we've talked about their semi-trucks that they're planning to build, the battery electric vehicle in 2021 and the fuel cell electric vehicle in 2023. The other vehicle that Nikola has really been advertising heavily has been its Badger pickup truck that it plans to release, what can you tell us about that vehicle?

Rosevear: I can't tell you much because there isn't much. What I can tell you is what they've said about it, which is that I think the idea is that it will have, both, a fuel cell and a battery, not a huge battery, but then it will be able to get 300 miles of range on battery only; so, I think that is a very big battery. And 600 miles with the fuel cell working as, kind of, a power-adder. So, it's, sort of, a fuel cell/battery hybrid, I think is the idea here.

They promised lots and lots and lots of power and torque and lots and lots of hauling capability, and that it will beat up a Ford F-150 and steal its lunch money [laughs] among other things. Nobody has seen this truck yet. They're planning some sort of event, some sort of reveal event at the end of the month; I think it's 28th or 29th, but we can find that out for you.

So, what to make of it? I don't know. Well, I do know that we should remember that Nikola is a fairly small company, it's only a few hundred people. And they apparently don't have much in the way of resources devoted to engineering this truck right now. So, I'm not sure it's much more than a good idea that they're looking for another partner to help them with. You know, will they end up building this on, you know, one of the Detroit automakers' architectures like they're doing with the big rigs? I think that's a possibility. So, the family connections through Exor, perhaps they have it in Fiat Chrysler. I don't know, I haven't heard anything, and I haven't seen any signs that they actually have a partnership signed yet. And I think Trevor Milton, the Founder and Chairman, said something the other day that they don't have a partnership deal yet, but they're in talks with, you know, unspecified automakers.

Sciple: Yeah, that's my understanding is that they plan to contract with other manufacturers to help build the truck, which is interesting, that they've, you know, taken some shots at Ford in the past week given that they might need to do business with them, but it is interesting that they're saying that they will start taking preorders on June 29th, and that folks who preorder will get priority access tickets to the Nikola World 2020 conference. So, folks who are big advocates for the company, it's a draw in to purchasing the vehicle. We'll see what plays out there.

When you look at Trevor Milton, Founder and CEO of the company, I looked up this morning on S&P Capital IQ, he owns 25% of the stock. I believe Citron Research, the short-sellers, took some unkind shots at him this past week. But when you look at Trevor Milton what do you make of him as a Founder of the company and current chairman?

Rosevear: I can't say I know him well; I haven't really talked to him yet, I've had a couple of friendly exchanges with him on Twitter, but, you know, I don't really know the guy personally yet. What I can say is, he got them this far, and where they are -- valuation of the stock is a completely separate question, but as a company they have a real shot to do this. And, yeah, he founded this and he got them this far, he got the partnerships in place to do it, he's got a production plant, he's got an engineering team, he's got significant interest from fleet operators, he's got demo trucks. He got them this far. You know, he has done a good job to lead the company this far, and now he has handed off day-to-day management to Mark Russell, who comes from Worthington Industries, I think, and was brought in, I think, last Fall, to sort of be the professional manager to take it to the next level while Trevor kicks himself upstairs as, sort of, Chairman and Product Visionary, which, honestly, is also a very smart move for a guy whose background is mostly in start-ups and so forth. You know, he doesn't have the experience to run a big truck company.

But he did have, sort of, the self-awareness and humility to bring in somebody who did, under pressure from his investors, but still he has readily agreed to it. He's been trying to become the voice of the company around social media the last week or two. He has not been [...] he seems like a friendly guy, go engage him, [laughs] he's chatty, you know, that's not a knock against him.

I think, in some of the things he said, I see his limitations in terms of the company becoming really huge. You know, he's like, "Oh, customers can always talk to me on Twitter." Well, if you're selling 20,000 pickups [...] on Twitter then the guy who [...] the truck's sprinkler is bad or whatever. [laughs] You don't want that. You know, I think Elon Musk has taken that on to some extent and I don't think he wants it either. [laughs]

So, I think in some ways, Trevor doesn't quite really have the depth of experience in this, sort of, part of the world to really see what's coming. On the other hand, he's well intentioned, and as I said, he took them this far.

Sciple: So, would you say, kind of, his transition into the chairman role as the company growing up into this full production, we're past the start-up phase and now we need to really institute a manufacturing culture, make these partnerships at scale and really start delivering this product?

Rosevear: It does seem like that. I mean, their chief engineer has background at, both, Daimler, the German parent company of Mercedes-Benz, and at Tesla. So, he has presumably ridden this bus, this, sort of, before going to market with a product ride before. They've got a professional team, they've got people with auto industry experience, they've got people with consumer product experience, they've got people with safety experience, they've got people with electronics and electric vehicles and software experience. It seems like the right kind of team you want to make this effort to take the shot.

I think we're at the point, you know, let's see how the products look when they're beyond the prototype phase and let's see how they're received in the marketplace and at the same time, let's see where there are other companies coming into this space as well before we get too excited about the opportunity.

Sciple: Yeah. So, I think that brings us to the investment case for the company today and the valuation. I mean, when you look at the financials, they say they have $10 billion in reserves for potential revenue, assuming all their contracted leases for their fuel cell EV come through they have $10 billion in revenue. However, that would be out in 2023.

You look at the market cap today, I pulled it up, $22 billion. So, we're trading at, you know, was it 2X 2023 revenue maybe? So, when you look at the valuation today relative to the potential of the company, what are your thoughts there?

Rosevear: Like many things in the current market, it's a little hard to justify. You know, this is a company that has no revenue. And they may have a little revenue in 2021, I don't think they're going to get $10 billion revenue all-at-once. I think that they [...] that's over several years, because I don't think they can fill them in less than three years or so. So, you know, spread that out. You know, they may have $1 billion of revenue in 2022, there's no real chance they'll hit it before then. And they seem to have a solid product, people who have seen their technology seem to like it. You know, they have secured significant investments. How it holds up in the real world, none of us know yet.

We also don't completely know what the playing field is going to look like when these trucks start to ship. You know, Daimler has been working on electric trucks for several years now, and they're a serious heavy truck player. Tesla, and its semi, is kind of a wildcard. When will that arrive and in what quantity and how will that be received, which [...] and its valuation? But Tesla is a heavy-hitter here compared to Nikola, they've been out there building vehicles for a decade now. So, we have to take them somewhat seriously, even if we don't know the timing for how extensively prototyped their product has been.

And then on the pickup side, if you take Ford Motor Company, Ford Motor Company is going to come back here, especially [laughs] in pickups. They will defend that franchise vigorously. They have an investment in Rivian, which is, sort of, the upscale electric pickup truck maker, another company with very impressive leadership and partnerships and engineering, that appears to be going about this the right way, with lessons they learned from others along the way. So, you know, that market might take on Nikola's Badger pickup instead, they can get a partner and get it to market in a couple of years. They're not really likely a threat for GM or Fiat Chrysler very much, but they might beat up Tesla's Cybertruck really good [...] So, we have to consider that this is not a wide open playing field, it may look like one now, but we're talking two to three years out, before they're really ramped up and producing trucks. And there are other people, who are in similar spots, who are investors, excited about Nikola, we might not really know about.

And so, there is a significant potential market for these trucks. Nikola has a promising product on the way, but it's way too early for this to be a $20 billion company. I think we all know that on some level. [laughs]

Sciple: Yeah. Obviously, when you're looking at a company that, you know, its vehicles are in prototype mode, revenue is essentially zero, certainly a lot of execution risk over the next few years, not to mention that very high market cap that we mentioned earlier. If you had to guess, where do you think Nikola will be in five years, John?

Rosevear: I think there's a good chance they'll do it, that they will have secured a market, that they will be profitable. You know, the Class 8 market is not that huge, which is obviously why they're trying to do pickup too, because you are not going to get hockey stick growth over the long-term selling tractor-trailer, so. The fleet of them is not nearly as big as with passenger cars and they last a long, long time. You know, there are trucks on the road that are 20 years old and 30 years old [...] daily service. If the total cost of ownership case is compelling then you will see big fleets switching over time, but they will not be the only game in town, they are up against at least one or two competitors who have significant fleet sales experience relationships with major fleet operators that go back years and years and so forth.

And if you have a fleet of 800 trucks and your orders are to go electric and you have a choice of dealing with, say, Daimler, who you've dealt with for 20 years and you know they deliver and you know they'll be around, or Nikola, you may not choose Nikola. And Nikola is going to, until Nikola has proven itself and proven that it's there for parts and service and that there's somebody knowledgeable on the other end of the phone when you call them up and need help; that takes time. So, they're going to have to establish that too.

I think the idea that every truck in the world is going to be Nikola in five years is a little much. On the other hand, I mean, there is definitely a route for this company if it continues to execute and deliver to take some of that market share and have a thriving profitable business, how big is that business is a little hard to say right now.

Sciple: I mean, it obviously sounds like given the execution risk, given the competition, the valuation today, not incredibly excited about jumping in right now. What would you want to see before you'd be excited to invest?

Rosevear: Good question. [laughs] I mean, I thought at $15, $20 this was intriguing. At $50, $60, $70 that's [...] I think what I'd want to see is -- I mean, I haven't done all the work around this to really seize the potential market opportunity realistically, I would want to do that, first of all. More broadly, I would want to see that the truck really is seeing what we see with fleet operators who have seen the prototype, who've seen the technology. I would want to see that IVECO is playing its part in the partnership, that it's still enthusiastic about this, which would suggest to me that what Nikola is doing in terms of engineering and in terms of bringing that engineering to market is still on track and is still positive.

And, you know, $10 billion in reservations is, sort of, a great number for your roadshow, but there's no cash there yet. I want to start to hear Nikola confirm, OK, you know, this is a solid order and we've taken $300 million in deposits for 2,000 trucks for [...] but you know what I mean. That there is actual cash coming in, that there is actual deposit, that there is actual intent to buy, there are signed contracts and so forth. That they will have deliveries right out of the gate, and ideally, some depth in their order books and that they are filling orders several months out. Once I see that, I will start to say, OK, this is a real company.

Now, the counterargument to that is, well, this is a start-up, you'll miss the boat if you do that. And there may be some of that, but right now it's a gamble, right now it's a gamble. Certainly, the current valuation. But things look good, they seem to have the right pieces, but, you know, will they execute on time and what valuation would the market give them once they're not an exciting start-up, but they are a truck maker? And, [laughs] you know, if they have stable market share and so forth. I don't think the valuation -- I don't think it's $20 billion.

Now, what happens with the pickups, do they form a joint venture with somebody and maybe have a low effort revenue stream out of that, leveraging the technology [...] that could make it more interesting. I think at minimum, I would wait to see what Trevor and company say at the end of the month about bigger trucks. Maybe we'll check back in a month, you know, I mean, it's a gamble right now, it really is a gamble. I personally don't feel comfortable investing in gambles. You know, if you do, get into this thing, but yeah, there's a lot of risk here.

And delivering on the present valuation seems like a bit of a longshot, at least, within the next few years certainly.

Sciple: Yeah, John, I feel similar to Nikola the way I felt a few months back about Virgin Galactic, certainly lots of promise about the potential market that could grow out of this, but you've got a company that hasn't yet delivered a product to customers, and at the very least, I'd like to see them do that and show that customers are satisfied before I want to jump in, particularly, at today's valuation where we're, you know, nipping on the heels of some really significant automakers.

But John, thanks, as always, for hopping on the show and sharing all your knowledge with us.

Rosevear: Thank you.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Austin Morgan for making us sound so good. For John Rosevear, I'm Nick Sciple, thanks for listening and Fool on!