It’s been since September that Chinese Electric Vehicle maker, Nio (NYSE:NIO), pulled off its IPO. At the time, there was buzz that the offering would be like investing in Tesla (NASDAQ:TSLA) in the early stages. But unfortunately, the deal has been mostly an expensive loser for investors. Keep in mind that the Nio stock price is off 37% since its debut.
This is yet another tough lesson about the IPO market. That is, the initial enthusiasm can easily fade away. Just look at recent offerings from LYFT (NASDAQ:LYFT) and Uber Technologies (NYSE:UBER). Hey, not long ago, the consensus was that these were can’t-miss deals.
Granted, whenever pessimism gets pervasive, there are usually opportunities to pick-up values. And perhaps this could be the case with Nio stock. But I still think a rally would be temporary as the company faces some tough challenges.
Here’s a look at three:
Nio Stock: Regulations and Geopolitics
There are certainly some major tailwinds for Nio stock. The Chinese government has the ambitious goal of having EVs account for roughly 20% of the country’s total car sales by 2025. In fact, China is already the world’s largest EV market, which saw sales jump an impressive 62% last year.
Yet there is a nagging issue: The Chinese government has actually been pulling back on some support, and this is expected to hit Nio particularly hard in the current quarter. Note that it is projecting a plunge in revenues of 55.9% to 59.5% (on a sequential basis).
Here’s what CFO Louis T. Hsieh had to say:
“That said, we expect a greater than anticipated sequential decrease in deliveries in the first quarter 2019, partially due to accelerated deliveries made at the end of last year in anticipation of EV subsidy reductions in China in 2019, as well as the seasonal slowdowns surrounding the January 1st and Chinese New Year holidays. We also expect deliveries in the second quarter 2019 to reflect continued weakness as we await the results of the 2019 EV subsidy policy in China and improvement in the macro-economic conditions.”
In the meantime, the company is likely to feel some pain from the emerging trade war between U.S. and China. This is likely to weigh on growth in China and could mean less demand for Nio cars.
And finally, the competitive environment for EVs is fierce in the country. Just some of the operators include BYD, Beijing Electric and Geely Automotive. What’s more, it looks like TSLA will make a big play for the market soon.
Nio Stock: Business Model
Nio has borrowed liberally from the Tesla playbook. But there are some notable differences. For example, Nio outsources its manufacturing to JAC. While this has accelerated the development, there are some major drawbacks. Consider that the company must still buy its own components and supplies.
This creates an odd situation. As Nio scales, the company does not benefit much from the economies of scale (the reason is that the arrangement is on a fixed cost basis). The result is that margins are constrained.
InvestorPlace.com’s Luce Emerson has aptly summarized the situation as follows: “No efficiencies. No moat. No upside.”
Nio Stock: Valuation and Funding
The valuation for Nio stock remains on the high side, with the price-to-sales ratio at about 5.7X. The company also continues to lose money. As for last year, the net loss came to $1.4 billion, and it looks like profitability remains far off. For example, Wall Street is forecasting a net loss of $6.08 per share for this year.
It’s true that Nio has major backers, like Tencent (OTCMKTS:TCEHY), that can easily fund the company. But then again, this will mean more dilution, and probably soon, as the company will likely need to do another capital raise to cover the burn.
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.