Has owning Nio (NYSE:NIO) stock made you seasick yet? It would be surprising if it hadn’t. Following its September IPO, which was priced at $6.25, NIO stock surged to a peak of more than $13 three days later, back to less than $6 by late October, rallied to more than $10 last month and then fell back to less than $6 per share, where it stands as of this morning. NIO Inc. stock has put investors through the wringer.
And some shareholders aren’t happy about the volatility… particularly the volatility that’s inflicted damage on their portfolios. In fact, a class-action lawsuit has been launched for those who invested in NIO and feel they were duped.
It may be a colossal waste of your time to jump on that bandwagon, though. The volatility of NIO stock was inevitable, and in the end its volatility will be irrelevant to most judges and juries.
That kind of uncertainty is what investors who bought NIO stock signed up for.
A Typical Post-IPO Story
NIO has been called the Tesla (NASDAQ:TSLA) of China, and for good reason. While many electric vehicles to-date have looked and felt like glorified go-karts, Nio — like Tesla — understands that form and function can also look cool. Nio’s ES8 is a luxury vehicle.
NIO is also a relatively new company, however. It was founded in 2014, only started to make vehicles in late 2017, and NIO stock only went public in September of last year.
NIO stock has also dished out the usual post-IPO swings. The volatility wasn’t caused by changes in the company’s outlook. Instead, it’s a reflection of the market’s ever-changing perception of what Nio is, and where it’s going.
But Tesla stock was also all over the map in its early days, as are most newly-minted stocks.
And that’s what makes the class-action suit by at least a few investors, bluntly, a little bit sad, if not terribly surprising.
The key tenets of the suits are (there are more than one, but they are all based on the same main complaint) summed up in a filing by one group of plaintiffs:
“The lawsuit focuses on whether the Company and its executives violated federal securities laws by making false and/or misleading statements and/or failing to disclose that: (1) NIO would not be building its own manufacturing plant and would instead continue to rely on JAC Auto to manufacture its vehicles; (2) reductions in government subsidies for electric cars would materially impact NIO’s sales; and (3) as a result, Defendants’ statements about NIO’s business, operations, and prospects were materially false and misleading at all relevant times.”
Voiced in fairly typical legal-ese, it sounds dastardly.
Read it again, though. Is NIO actually “guilty” of anything?
It’s true that Nio will continue to work with JAC to develop electric vehicles. But the company never gave a definite time frame as to when it might build its own facility.
Here’s the kicker on the matter: Nio is actually trying to help itself and the owners of NIO stock by not taking on the steep expense and risk of committing to its own plant right away. Ironically, one of the chief complaints about Tesla in its early stages was how much it spent (and arguably shouldn’t have) on building its own production facility.
As for the subsidy issue, the company has actually said little about the impact of subsidy changes. It would be naive on everyone’s part, however, to think that a termination of subsidies wouldn’t create some sort of headwind for NIO stock. That is, to borrow a term from the patent-law world, “obvious” and therefore should not be grounds for a lawsuit.
Moreover, the plaintiffs haven’t shown that subsidy changes have had a quantifiable, verifiable impact on NIO’s business.
As for the charge that the company’s business, operations, and prospects are “materially false and misleading at all relevant times,”clear definitions of “material,” “misleading” and “relevant” must be provided. Those are tricky words for any judge or jury to define.
If the class-action suit ends up being successful, then almost every company in the world that’s ever disappointed investors for any reason at any time is now subject to litigation. That’s just not going to happen.
The Bottom Line on NIO Stock
The real story isn’t the class-action lawsuits that are taking shape. Indeed, it would have been surprising if such litigation didn’t materialize. Most companies whose stocks drop in the wake of their IPOs face some sort of legal pushback because we’ve become a litigious society.
Facebook (NASDAQ:FB) — one of the most rewarding investments since the subprime meltdown — was sued shortly after going public in 2012 for allegedly covering up worries about its growth prospects. It settled for a laughable $35 million last year, which was probably cheaper than continuing to fight the case.
The real story is that this sort of legal and even philosophical wrangling is all part of the growing pains that any new company has to face.
Nio didn’t do anything wrong. All equity investments always carry some risk. The shareholders of a company don’t receive a contract.
When you own a stock, it’s understood that you’re granting decision-making authority to the company’s management, who have every right to change their minds about issues. It’s a given that a company may never turn a profit; it’s possible that a company may crash and burn. Just ask the people who bought Groupon (NASDAQ:GRPN) stock based on the company’s brilliant concept that, as it turns out, isn’t a terribly profitable one.
Groupon settled its post-IPO suit for a scant $45 million.
The plaintiffs suing Nio probably won’t be able to prove any actual malfeasance by the company. At best, they will prove that they are frustrated because they bought into the hype of the media and the mob vis-a-vis NIO stock.
Welcome to the stock market.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.