When it comes to Nio (NYSE:NIO), the Chinese electric vehicle manufacturer, I’m on record against owning Nio stock.
“I believe Nio’s Altman Z-Score indicates that if it doesn’t shore up its business soon, there’s an excellent possibility it could face financial distress in the next 12-24 months,” I wrote June 21.
I went on to suggest that a combination of potential bankruptcy, increased competition in the electric business, and a negative gross margin, made NIO a losing proposition.
I got emails telling me to be kinder when talking about Nio.
You know what they say: If it walks like a duck, and it quacks like a duck; it’s a duck.
However, recommending that someone shouldn’t put their hard-earned savings into a money pit like Nio, isn’t the same thing as saying all investors should avoid Nio stock.
After the Nio stock price hit a 52-week and all-time low of $2.35 in June, it’s bounced back nicely in the first two weeks of July to just under $3.50.
If you’re an aggressive investor and can afford to lose your entire investment, here’s why I believe now is an excellent time to take a chance on NIO.
The ES6 Is a Potential Catalyst for Nio
While analysts are cutting the sales forecasts for Nio’s first production SUV , the ES8; it’s second SUV, the ES6, is now in production. In fact, Nio delivered the first vehicles on June 18 to lucky owners in several Chinese cities including Beijing and Shanghai.
Smaller than the ES8, it packs a pretty punch, delivering between 430 and 536 horsepower, depending on the engine. The 84-kWh battery has a range of 317 miles, making a trip from New York to Boston free of range anxiety.
For this reason, while neutral on Nio stock, UBS analyst Paul Gong believes the ES6 could be a gamechanger for the company. Gong estimates that Nio could deliver more than 2,000 of the ES6 monthly in the second half of 2019, providing Nio with a better selling, mass-audience SUV than the ES8.
It could be, in Gong’s words, “the best selling premium car from a local brand.”
Although Gong’s only got a $4 price target on Nio stock (the average price target of six analysts covering its stock is $7.90) his analysis about Nio’s second production car despite an overall skepticism about the company and its stock, ought to be encouraging to aggressive investors.
Trading 13% below Gong’s target, there’s room for investors to make some money in the next 6-12 months.
A Potential Bankruptcy
When I bring something like the Altman Z-Score into a conversation about a stock, it’s meant to provide a worst-case scenario. Given Nio’s financial situation, it could go bankrupt. So, too, could Tesla (NASDAQ:TSLA). That’s the reality of early-stage electric vehicle production.
However, Tesla’s been able to produce three vehicles with more on the way, by raising additional debt and equity. Nio will likely have to go to investors on more than one occasion over the next 12-24 months to raise additional capital. That’s got existing investors worried about dilution.
While understandable, if I’m still holding IPO shares bought at $6.26 on Sept. 11, 2018, I’d be thrilled to have a smaller piece of a larger pie, than no piece at all.
I can’t say whether the Altman Z-Score for Nio is foreshadowing a future bankruptcy. No one can. If you’re an aggressive investor, I don’t think this enters into your assessment of whether to buy or not.
You’re interested in whether or not it can move up to its IPO price in short order so that you can make a quick buck off interest in the ES6. It’s that simple.
Now, if you’re an aggressive, long-term investor like Catherine Wood, who is Tesla’s number one supporter behind Elon Musk, I think you’re more concerned about what the future looks like beyond the ES8 and ES6 because it’s hard to stay in the car game with just two models.
Originally, Nio planned for its third vehicle to be the ET7 sedan. However, with lagging ES8 sales, it now plans to bring out another vehicle on the ES platform. What that looks like has yet to be revealed, but Nio’s future depends on it being a winner.
Could the next ES vehicle be Nio’s Model 3?
We’ll find out soon enough.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.