When Chinese electric-vehicle maker NIO (NYSE:NIO) launched its IPO on Wednesday, NIO did not look so inspiring. The company priced its stock at $6.26, which was on the low-end of the $6.25-$8.25 range. NIO IPO raised about $1 billion, but NIO wanted to raise $2 billion-$3 billion. The first-day performance of NIO was also muted. Note that the shares rose only about 5.4%. The underwriters on the deal included Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and JP Morgan (NYSE:JPM).
But on the following day, the situation changed dramatically. Suddenly there was a burst of buying, propelling NIO stock to $12.69! And by the end of the trading day, the gain was a sizzling 76%.
The NIO IPO seemed more like a car spinning out of control. And the company is facing multiple negative catalysts, including low revenue, a significant cash burn rate, and an intense competitive environment. For these reasons, investors probably shouldn’t buy into the NIO IPO in the near-term.
A Look at the NIO IPO
NIO, which translates to “Blue Sky Coming” in Chinese, is the creation of William Li, who is also the founder of Bitauto (NASDAQ:BITA). He launched NIO in 2014.
According to his shareholder letter in the company’s S-1 filing:
NIO was founded at a time when the world has been experiencing what may be the most significant technological change in the more than 100 years’ of development of the automotive industry. Increasingly sophisticated technologies such as autonomous driving, electric car technology, artificial intelligence, and cloud services are reshaping the automotive industry. We believe that these innovative technologies will not only relieve drivers from the monotony of their daily commutes, but also make cars safer and more environmentally friendly and transform the car into a mobile living space, ultimately becoming a broader part of a user’s lifestyle.
It’s a big vision – and yes, it’s also expensive. So before the IPO, Li raised over $2 billion in funding from investors like Tencent (OTCMKTS:TCEHY), Baidu (NASDAQ:BIDU) and Sequoia.
When it comes to strategy, NIO has relied heavily on the Tesla (NASDAQ:TSLA) playbook. To this end, it started with a supercar, which was launched in 2016. Then in late 2017, the company went more mainstream with its ES8, which is an SUV that seats seven. It has a proprietary electric powertrain system that can go from zero to 100 km per hour in 4.4 seconds.
And as for the end of this year, NIO expects to launch a lower-priced SUV that seats five, called the ES6. It should hit the market in the first half of 2019.
Bottom Line on the NIO IPO
NIO is still really a startup. For the first half of this year, its revenues have been a mere $7 million.
And of course, its cash burn rate is also significant. Consider that its losses so far this year have been about $502 million. For the most part, it’s a good bet that it will need to raise more capital within the next 12 months, which could put pressure on the stock price. Keep in mind that the company currently outsources its production. So going forward, it will probably have to undertake the expensive task of building its own production facilities.
Finally, the competitive environment in China’s electrical vehicle market is intense. Not only are there larger operators like BMW, Nissan Motor (OTCMKTS:NSANY) and Volvo but also a variety of startups, such as Xiaopeng Motor and Byton. It also is not encouraging that the Chinese auto market has been slowing down.
In other words, the NIO IPO is still a big-time risk. And as the wide swings in the stock price indicate, it’s probably a good idea to wait for things to settle out.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
