A little over two months ago, I warned about the hype surrounding Nio (NYSE:NIO) stock. Nio’s CEO, William Li, made an impressive appearance on 60 Minutes to share the electric vehicle maker’s story with the world. NIO stock, predictably, surged as people learned about China’s potential Tesla (NASDAQ:TSLA) killer.
Unfortunately, investors got a little ahead of themselves. Nio is still just getting off the ground. The company briefly hit a $10 billion market cap following the 60 Minutes appearance. That was a rather ambitious valuation for a company that sold fewer than $1 billion in vehicles last year.
However, with NIO stock now down 50% since the beginning of March, is it finally time to buy?
Nio’s Market Is Highly Competitive
From the amount of attention Nio has generated, you might think it is the big dog in the Chinese electric vehicle market. In fact, however, the company is still a tiny player, at least for the time being. You can see this by looking at the top 20 vehicle models sold in China recently — NIO doesn’t have a single one among the best-sellers.
For what it’s worth, Tesla isn’t in the top 20 either. Instead, it’s less famed companies like BYD and BAIC leading the way. NIO’s prospectus noted that there are more than a dozen competitors already active in the marketplace.
This raises an important question. There are obviously huge tailwinds behind the EV market, particularly in China. Given that country’s issues with pollution, electric vehicles are taking share rapidly compared to other emerging markets. But will Nio be able to capitalize on this opportunity?
Huge Burn Rate for NIO Stock
Anyone considering an investment in NIO stock must think about the company’s cash position. Nio managed to lose more than $1.4 billion in 2018. Impressively, this figure almost doubled in 2018 even as Nio started to make substantial revenues. Adjusting for various items, Nio blew through $1.15 billion in cash last year, and that doesn’t even include capital expenditures. Rather incredibly, over the past four years, Nio has lost $5 billion.
Coming into 2019, Nio had more than $1 billion in cash, and they brought in another $750 million in a debt offering earlier this year. Still, with Nio losing more than a billion dollars annually, they’ll likely run out of cash by the middle of next year in the absence of another capital raise.
One interesting factor for Nio is that Tencent (OTCMKTS:TCEHY) is a major owner. Tencent, in fact, has nearly 20% of NIO’s outstanding stock. This represents a major sign of credibility for Nio, as Tencent is one of China’s most respected tech companies.
On the other hand, Tencent’s holding amounts to less than 1% of its market cap in value. While Tencent indeed owns a ton of NIO stock, it’s still of only modest significance to Tencent’s overall corporate outlook. Given Nio’s likely need to raise (a lot) more money in coming years, it will be interesting to see if Tencent or other affiliated parties will be willing to keep funding Nio.
Without a major backer filling that need, it’s hard to see how Nio will be able to keep raising money without massively diluting shareholders.
Ideally, Nio should have sold a lot of stock when shares traded up at $10. Here under $5, it’s a lot harder to raise the hundreds of millions of dollars per quarter that Nio will need to keep scaling up its business.
Few Hard Assets
These mind-blowing losses get even stranger when considering that Nio doesn’t manufacture their own vehicles. Instead, they outsource that to a state-owned player, JAC. Nio pays JAC a fixed fee rate per vehicle that they assemble for Nio. This unusual set-up seemingly takes away much of the gross margin upside for Nio as they hopefully sell more cars going forward.
Nio wants to be a lifestyle brand. There’s good economic incentive to focus on that while leaving the nitty gritty details, such as manufacturing, to others. Ultimately though, if you are going to blow through billions of dollars, you’d expect to get a little more in return. Right now, NIO stock is backed by very little to support the share price aside from the brand.
As such, you have to have a great deal of faith in CEO William Li’s vision for the company. Given the company’s worsening financial position, the market could put that faith to the test rather soon.
NIO Stock Verdict
Normally, as a stock declines in value, it becomes a more attractive purchase. This may be a rare exception to the rule. Nio’s share price represents the market’s confidence — or lack thereof — in Nio’s prospects. If NIO stock continues to tank, it could become difficult for the company to raise any more funds at all.
While it’s attractive to think about NIO stock as the “Tesla of China,” that may be an ambitious comparison at this point. For one thing, Nio has minimal investments in battery charging/swapping. Unlike Tesla, it relies on public infrastructure for this service. Given that Nio has no edge here or in manufacturing, you have to wonder what will make Nio stand out in a crowded market.
The company is making a strategic play to become a luxury brand, but given Nio’s huge cash burn and cratering stock price, they may run out of time before reaching profitability. Even under $5, you should only look into NIO stock if you have substantial risk tolerance and go into it knowing that you may lose most or all of your investment.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.