Are Nio (NYSE:NIO) and Nio stock about to get crushed?
In April, the Chinese electric-vehicle maker announced that it is permanently closing its San Francisco office effective June 8, putting 50 people out of work. It also announced that it is cutting 20 people at its North American headquarters in San Jose, also effective June 8.
Nio put a positive spin on the closures.
“After four years of rapid growth, we’ve set up a global organization. However, fast development has also posed issues like repetitive functional departments, undefined work tasks, unclear work responsibilities, and insufficient work for certain people,” a Nio spokesperson told The Verge. “We would like to solve them by optimizing management efficiency this year.”
Those who follow Nio and Nio stock aren’t going to be surprised by the news. In March, the company announced it was cutting 3% of its global workforce to optimize its corporate structure.
Running Car Companies Isn’t Cheap
As we’ve seen from the struggles at Tesla (NASDAQ:TSLA), it’s neither easy or cheap to run an automotive company, especially not an electric one.
To keep the company moving in the right direction, Tesla was recently forced to seek more debt and equity financing . Tesla aims to raise $1.35 billion in debt, and the remaining $650 million in equity. TSLA’s move came after its cash on hand’ dwindled to $2 billion, a large sum, but an amount that quickly disappears when building cars and trucks.
Nio Stock Is Risky
So, getting back to Nio.
If you’re long Nio stock, you probably want to believe that CEO and founder Li Bin is cutting 3% of its workforce because the employees have become redundant, not because it’s running out of cash.
However, as InvestorPlace contributor Vince Martin recently stated, a lot can go wrong at Nio.
“NIO’s competition is intense, with Tesla presumably poised to join the Chinese EV market within the next twelve months. The Chinese economy has to cooperate to ensure a steady base of wealthy customers who will buy high-end Nio vehicles,” Martin wrote in a column published on May 3.
In other words, there’s no surefire path to profitability for Nio, making Nio stock quite risky.
The Bottom Line on Nio Stock
I recently wrote that both Tesla and Nio should not be in your retirement funds. Ever.
I did acknowledge that Nio’s first-quarter results were better than expected, suggesting that Nio stock deserves to be in the same conversation with Tesla.
“I never would consider Nio stock to be superior to Tesla stock. However, Nio’s upgrades and better-than-expected delivery numbers in its Q1, combined with Tesla’s Q1 delivery miss, suggests that the two stocks aren’t nearly as different as investors might think,” I wrote in a column published on Apr. 8.
Nio is going through many of the same issues that Tesla’s gone through, and still going through, which makes Nio’s North American job cuts less troublesome. Companies have to do what needs to be done to stay in business.
However, when Tesla stumbled and bumbled its way to building the Model S and Model X, it faced very little competition. Now all kinds of companies are making electric cars, making Nio’s job cuts a real sign of weakness for Nio stock.
Investors who are willing to take risks are better off buying shares of Tesla than Nio stock, given Tesla’s greater experience.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.