Just six months ago, analysts loved to compare Nio (NYSE:NIO) to Tesla (NASDAQ:TSLA). Observers said that Nio was the Tesla of China. Nio’s CEO did little to downplay this comparison, at one point suggesting that Nio could be the Tesla-killer, and Nio stock responded accordingly.
Lately, however, the Tesla comparison has proved prescient for all the wrong reasons. Both Tesla and NIO have plummeted in lockstep, leaving bears gleefully counting their gains from the two companies.
However, after plunging all year, Tesla stock finally found its bottom and has bounced 20% since early June. Meanwhile, NIO continues to plummet. In a funny twist of events, the “Tesla of China” appears set to go bust long before Tesla (the bears’ most hated stock) gives up the ghost.
Nio: An Ugly About-Face
Generally, it takes a bit of sleuthing to figure out how bad a company is doing. With Nio, however, they made their weakness obvious. This is what happened.
In April, Nio announced that it would be launching an all-new sedan titled the ET7. While sedans aren’t that popular in the United States right now, they’re a huge portion of the market in China. So the proposed model made sense. Alas, as Nio announced its latest set of dreadful quarterly results, it had to pare back spending.
This resulted in Nio indefinitely suspending the production of the new ET7 just six weeks after it was announced. For all the grief skeptics give Elon Musk for not following through on goals, even he doesn’t give up on new ideas that quickly.
Nio CEO William Li said that he had to delay the sedan to an unspecified later date for several reasons. These include that it requires new technology that isn’t ready yet, and that the company needs its own production line to make the sedan.
Remember that Nio currently outsources its production to other Chinese manufacturers. This is a key part of the bearish thesis on NIO stock. When you don’t control your own production, it makes quality control more difficult, and it also greatly limits your profit margins.
Toxic Balance Sheet
Unfortunately, Nio may not be able to ever raise the funds necessary to launch its own production capacity. My hunch is that this is why the sedan is now dead in the water. It’s expensive to build new factories from the ground up, and Nio simply doesn’t have the fiscal resources to make major investments at this point.
As of the last quarterly report, Nio had $1.1 billion in cash left. That may sound like a lot. But it generated a lot of that cash through additional borrowing during the quarter. All told, the company burned at least $600 million in just one quarter, according to management on the conference call. The real figure may be higher yet.
With sales plummeting thanks to the loss of subsidies and rising competition, things are unlikely to get better anytime soon. This suggests that at the current burn rate, Nio will run out of cash within two quarters – that is to say – by the end of 2019.
Bank of America downgraded the stock following the quarterly earning report suggesting that Nio would need to raise money in 2020. It may need to do so even sooner than that.
In any case, without finding a massive new source of funds, Nio has no way of building a new factory to produce sedans or any other vehicles for that matter. How much is an electric vehicle company worth with no factories, plunging sales, and a darkening competitive outlook?
NIO Stock Verdict
At around $2.50 a share, NIO stock may appear cheap, but don’t let appearances fool you. The company is still worth almost $3 billion in market cap, to say nothing of all its debt on top of that. That’s a huge valuation for a company that lost $3 billion in operating income over the past 12 months. Even if it could raise capital at today’s share price in huge quantities, it would need to double the outstanding float simply to pay for one more year of expenses.
Some bulls on NIO stock hope that its big backers, like Tencent (OTCMKTS:TCEHY) will put more money into Nio. That is certainly one option that could keep the company afloat awhile longer. But Tencent didn’t grow to be one of the world’s most valuable enterprises by bailing out struggling firms with sweetheart deals. Make no mistake, if Tencent or another big player saves Nio, they are going to extract a pound of flesh from the American shareholders that own NIO stock at present.
NIO stock is turning out to be a classic lesson in buying a hyped up stock with no fundamentals. Nio’s CEO made a great pitch on 60 Minutes, sending the stock to the stratosphere. But there was almost nothing there in terms of a solid business plan. As Nio burns the last of its cash, look for shares to head deep into penny stock territory in the coming months.
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.