Shares of Nio (NYSE:NIO) stock have been hit hard. The Chinese electric-vehicle manufacturer currently trades at $2.60/share, down from its IPO price of $6.26/share. The Nio stock price is down more than 80% from its all-time high of $13.80/share.
With a weak local auto market, a trade war that prevents American expansion, and a slew of issues such as battery fires, is “China’s Tesla” still a strong opportunity?
I say “No.” Despite high expectations the company will become the “Chinese Tesla,” this has yet to be realized. The company continues to generate not only losses but negative gross margins. With a weak balance sheet, the company needs continued dilutive capital infusions.
The Chinese electric vehicle market is overly saturated. And with the relaxation of foreign-ownership laws, companies like Tesla (NASDAQ:TSLA) are moving into the market as well.
Tie all of these together, and “China’s Tesla” remains a long shot, with too many risks outweighing the upside. Investors have better opportunities elsewhere, and should avoid/sell their Nio shares.
Nio’s Local Market Issues
According to Reuters, Chinese car sales declined for the first time since the 1990s. April vehicle sales were down 14.6% year-over-year. Chinese electric vehicle sales have not declined, but sales growth has flattened. May 2019 EV sales were up only 1.8% YOY.
To counter this slump, the Chinese government is increasing the number of car licenses. But despite this state support, the Chinese government has decided to phase out EV subsidies. The EV subsidy cut has materially impacted Nio’s performance, with sales falling 50% from the previous quarter .
Additional Risks Impact Nio Stock
The U.S.-China trade war is another risk factor. The company expected to commence sales in America starting next year. But with all the uncertainty regarding trade, among other issues, Nio has shelved these plans.
Nio continues to be reliant on third-party manufacturers. The company makes its cars at a state-owned JAC Motors facility. Nio essentially subsidizes the JAC plant’s operations, with the company agreeing to compensate for losses until April 2021.
Like other electric vehicle makers, battery fires have been an issue. On June 27, Quartz reported that 4,800 of Nio’s flagship ES8 SUV were recalled due to battery fire issues. This was about 1/3rd of ES8s out on the road.
Put all these risks together, and it is clear that the company is not ready for prime time. But despite these red flags, US investors continue to give the company an inflated valuation.
Nio Stock Valuation
Despite many risks, Nio stock continues to trade at a high valuation. A look at their most recent financials highlights a variety of red flags:
- Vehicle sales down 54.6% YOY
- Negative gross margin of 13.4%
- Net loss of $395.2m ($0.38/shares)
- Q2 2019 sales anticipated to decline an additional 20-30% from the first quarter
To keep the company operational, state-owned fund E-Town Capital has invested $1.45 billion into a joint venture (Nio China). This partnership will give the cash needed to operate/expand. E-Town capital will also help the company build a factory and/or find new manufacturing partners.
While this arrangement keeps the company solvent, it highlights the risk of dilution. The Nio stock price could fall further if the capital infusions continue.
The Nio stock price has been supported by the fact it is the only pure play Chinese EV maker trading on a major exchange. With competitors such as BYD (OTCMKTS:BYDDF) trading over-the-counter in the US, Nio is the more liquid Chinese EV play.
But easy access doesn’t make a good investment. The fundamentals of the company are weak. With heavy competition from more established car makers, Nio needs nothing short of a miracle to reverse their sales declines.
Bottom Line on Nio Stock
Of all the long-shot “story stocks” out there, Nio may be one of the least attractive opportunities. With a weak home market, wobbly balance sheet, and high expectations as “China’s Tesla,” the company has yet to produce results. With Tesla opening a facility in Shanghai, why invest in the “Tesla of China” when Tesla itself is in China?
On the other hand, with heavy short interest, a squeeze is inevitable. But playing a short-squeeze can be like catching a falling knife. Timing the market is tough, as you can’t predict the unpredictable.
For the time being, NIO is a hard pass. Unless the company succeeds in gaining critical mass in its home market, I doubt it will become “China’s Tesla”.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
