Investors may be tempted to think that after a precipitous decline from north of $10 per share to the $4 range, Nio (NYSE:NIO) stock looks cheap. To those who find this to be a buying opportunity, I have just two words: caveat emptor.
There are just too many ways for NIO stock to keep sliding south. Recently announced cuts in EV car subsidies will weigh heavily on already-pressured revenues. Even without the negative effect of reduced subsidies, Nio managed to practically double its net loss year-over-year. Imagine what that number could look like after these deep cuts (over 50%) for their vehicles.
Their cash burn since IPO has been prodigious. Some estimates come in at around a billion dollars a year. In an extremely competitive market and a capital intensive sector, that’s not a great combination.
There is also country risk at play, with China in the throes of the ongoing trade war. With an increasingly challenging macro backdrop and ugly financials, additional capital raises are no guarantee either.
I don’t know that Nio stock goes to zero, but let’s just say if it’s trading over the counter by year-end, I wouldn’t be surprised.
Structural Issues at Play in Nio Stock
Nio claims that it is a pioneer in China’s premium EV market. The company designs, manufactures, and sells premium electric vehicles. While this flash-to-bang approach may seem integrated in a cost-effective stance, think again.
What it really means it that Nio appears to be an OEM in the auto sector. In reality, it’s a confusing mish-mash of a business model.
The company outsources certain parts of the business, like manufacturing, but they simultaneously engage in capital-intensive aspects of the supply chain like buying raw materials. The manufacturer is none other than JAC Motors, a state-owned enterprise contracted to make their vehicles.
So Nio stock investors in effect own a company that bears the burden of all the big fixed costs and then has its upside capped because there aren’t any efficiencies to be gained when you pay a manufacturer a fixed rate.
No efficiencies. No moat. No upside.
Bleak Outlook for Nio Stock
Normally the business outlook is where companies try to say, “maybe we haven’t met expectations, but the future will be better.” With Nio stock, based on the outlook given by management, it would be foolish for anyone to think that the future is anything close to rosy.
Deliveries of the model ES8 in the first quarter will mark “a decrease of approximately 56.1 [%] to 52.4 [%]” from the fourth quarter of 2018. This will bring total revenues down somewhere between 59.5% and 55.9%. What is that in dollar terms? Some $202 million to $220 million. There is no silver lining here.
Even if this is just a preliminary view on the business situation and subject to change, it’s clear that the business and the company are struggling mightily without a clear turnaround.
The $4.67 current share price doesn’t reflect a future in which deliveries and revenues continue to slide. Hence the danger in thinking that the stock will recover. While it’s similarly dangerous to try to pinpoint an exact number that is a fair price for Nio stock, the secular decline and multiple headwinds leave plenty of downside from current levels. There are simply too many ways to lose.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.