Is it all downhill from here?
It is too early to say for Nikola , the electric-truck startup rocked on Monday by the resignation of its executive chairman and founder, Trevor Milton . The signs aren't good, though. They also are looking bad for the bubble in new technologies and financing methods.
Electric vehicles and special-purpose acquisition companies have been like the peanut butter and jelly of the recent boom, giving inexperienced retail investors access to the emerging technology without having to wait for the cumbersome process of an initial public offering and the cursory due diligence it entails.
But if Nikola turns out to be "an intricate fraud" as short-seller Hindenburg Research alleges, vaporizing the value of a profitless company briefly worth more than Ford Motor , that won't have been the sign of the end. Most frauds typically emerge after bubbles have burst -- "when the tide goes out," as Warren Buffett said. Think of Enron and WorldCom in 2001 and 2002, Bernard Madoff in 2008 or Ivar Kreuger's Swedish Match in 1932.
Instead, financial historians might eventually point to the confidence- boosting deal earlier this month between General Motors and Nikola . Shares of both companies rose sharply on the day their venture was announced. Past new technology bubbles have been close to their peak when the enthusiasm of the masses spread to serious and sober businesspeople like GM's Mary Barra . About 20 years ago it was Jerry Levin , boss of the world's largest media company Time Warner , who agreed to sell it to AOL in an all-stock deal at the height of the dot-com bubble.
Investors should take little solace when financial analysts endorse such deals with hyperbolic statements.
"Together, they represent an unprecedented powerhouse," said a Bear Stearns analyst at the time about one of the most disastrous deals in history.
"There have been many skeptics around Nikola and its founder Trevor Milton's ambitions over the coming years, which now get thrown out the window with stalwart GM making a major strategic bet on Nikola for the next decade," wrote Dan Ives , a Wedbush technology analyst after the Sept. 8 announcement.
As Peter Atwater , a lecturer at The College of William and Mary who specializes in public mood, presciently put it in a note a few days later, "at extremes in sentiment even the adults in the room capitulate and want to join the cool kids."
If fraud allegations prove true, the financial and reputational damage to GM and Ms. Barra won't be what it was to Time Warner and Mr. Levin, respectively, since it wasn't a full acquisition. But the episode could stop executives at other profitable and established firms from moving ahead so quickly in inking deals with young, cool, overnight billionaires. That is crucial because, though many new technologies are real and will be lasting -- the internet was -- most early movers aren't.
Even as some personalities blow up while a bubble is inflating -- think Adam Neumann and We Co. or Markus Braun and Wirecard -- new heroes emerge. Since their billions offer little in the way of current cash flow, their success requires people who fear missing out. SPACs have been a great tool for that, but when the FOMO jumps from retail investors to the boardroom and then makes an executive look foolish, then it can quickly poison the well.
With stocks world-wide down sharply on Monday, continuing last week's selloff, Mr. Atwater said that "it feels like the crowd has gone from believing anything to believing in nothing.
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