Electric-car maker Nio (NYSE:NIO) announced March 5 that it was scrapping plans to build its own factory in China. NIO stock is getting pummeled on the news. Is now the time to buy?
In a word: NO.
Sure, Nio might have just been named one of the World’s Most Innovative Companies by Fast Company, but that doesn’t mean you should buy NIO stock at this point in the company’s development.
At least not if you can’t afford to lose your investment.
However, when a stock drops by more than 10% in a single day of trading, color me interested. Investors typically overreact to news, good or bad, with equal enthusiasm. Successful investors have learned that it pays to live somewhere in the middle where good news won’t make you rich and bad news won’t make you poor.
The game is played over nine innings. A lot can happen to knock Nio stock down further or catapult it back over $10.
I think it will continue to fall. Here’s why.
Tremendous Losses
At the same time Nio called off its Shanghai factory, it also announced fourth-quarter 2018 results.
On the top line, revenue in Q4 rose 134% over Q3 2018 to $499.7 million. On the bottom line, it lost $0.47 a share, 69% less than its losses in the third quarter.
That is good news. The bad news is Nio’s losses continue to pile up. For all of fiscal 2018, Nio lost $1.3 billion on $720.1 million in revenue. On a per-share basis excluding share-based compensation, it lost $3.90. With just $1.2 billion in cash on its balance sheet, it could run out of money before too long.
Investors might read that Nio had a vehicle margin of 3.7% in Q4, up from -4.3%in Q3, and think that’s a good thing. It’s not. While it is better than in the previous quarter, it’s still nowhere near what it needs to make from each car to become profitable.
Just ask Elon Musk about the math.
And in case you’re wondering, Nio had a vehicle margin of -1.6% for the entire 2018, which means if it sold a car for $70,000, it took $71,000 to make it.
Anemic Vehicle Production
Automotive experts suggest that Nio needs to make 100,000 vehicles annually to achieve economies of scale that will lead to eventual profitability. In 2018, it sold just over 10,000 — well short of the target.
Sure, Tesla (NASDAQ:TSLA) had to climb the same mountain, but given the pathway, Musk has made for electric vehicle companies like Nio, you would think it could do better. As competition from the existing automotive manufacturers heats up, there’s a real possibility that Nio will get left behind.
“A lot of market uncertainties are now involved, with the price cut from Tesla and Nio’s own sales projection,” said independent automotive consultant David Zhang.
How bad are Nio’s projections for Q1 2019? It expects to deliver between 3,500 and 3,800 ES8 vehicles, 52% less than in the fourth quarter and 13% lower than in the third quarter.
And that doesn’t take into consideration the opening of Tesla’s Shanghai plant in late 2019, early 2020.
The Bottom Line on NIO Stock
In my most recent article about Nio in November, I finished off by stating that I couldn’t see the company hanging in for 14 years as the Tesla CEO has done. With these latest results, I’m even more confident.
“As stocks go, NIO stock is not worth your time,” I wrote November 28.
Three months later, my only addendum would be, “It’s only worth your time under $6 and only if you’re the most speculative of investors.”
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
