I’ve been bearish on Nio (NYSE:NIO) stock in the past. And with good reason; the company’s outlook has weakened throughout 2019 on mounting losses, falling deliveries, and strategic uncertainty. As NIO’s stock price continues to decline, it’s time to reevaluate the situation. Is there any value in NIO stock yet as it slides under $3?
Unfortunately, the answer is still no. As much as NIO stock is going down, arguably, its fundamentals are getting worse at an even faster rate.
Just this month, we have key employees leaving, a huge layoff, and more falling delivery numbers. With Nio rapidly burning through its remaining cash, Nio’s outlook is continuing to grow even dimmer.
As Investorplace reported last week, Nio is laying off more employees. An internal memo leaked out saying that the company is letting go of around 1,200 employees to get its headcount down to 7,500.
This move comes on top of a previous round of layoffs earlier this year. Presumably, the layoffs are in response to the company’s plummeting delivery volumes this year, along with its growing cash crunch.
In addition to that, Nio’s co-founder unexpectedly resigned recently as well. Nio tried to reassure investors, saying that it’s business as usual. But clearly, it’s something to keep an eye on, particularly with Nio still being such a young company that only IPOed a year ago.
Questionable Merger Rumors
When you see dubious automotive merger rumors, you probably think of Tesla (NASDAQ:TSLA). After all, someone just floated the idea that Volkswagen was supposedly interested in buying out Musk’s automotive firm. And who can forget Musk’s $420 funding secured tweet from last year? The latest rumor didn’t last long, however, as Volkswagen denied any interest in a deal.
However, we have yet another similarity between Nio and Tesla, in that Nio was the subject of unconfirmed rumor chatter at the same time as the Tesla/Volkswagen rumors. Given that major investors such as Baillie Gifford have stakes in both Tesla and NIO stock, maybe there is coordinated PR for both firms as well.
In any case, social media lit up with rumors that Nio may split off its self-driving car unit and merge it with Chinese ride-sharing firm Didi. This led traders to briefly bid up NIO stock. But it will take hard facts, not just possible future deals, to get NIO stock out of its slump.
NIO Stock: Bank Of America Is Not Impressed
Following July’s weak delivery numbers, analysts expressed their disappointment. Bank of America’s analyst Ming Hsun Lee said that: “We have an Underperform rating on NIO, given: (1) we expect ES8/ES6 orders to be weak, (2) competition in EV is intensified, (3) high refinancing risk due to weak FCF”.
To be fair to Nio, they do expect deliveries to pick up considerably in August. As the CEO put it, “Looking ahead, with battery capacity allocation back to normal, we will accelerate deliveries and make up for the delivery loss impacted by the recall. We expect August to be a much stronger month, and target to deliver between 2,000 and 2,500 vehicles.”
Don’t get too excited about that 2,000-2,500 figure for August, however. That’s merely what the company was supposed to be delivering on a baseline level.
Bank of America’s analyst had forecast 27,500 deliveries for 2019, after all, which works out to more than 2,000 per month. Even at that level, Nio loses nearly one dollar for every dollar of sales it generates. Throw in a terrible month like July (not to mention the massive product recall from earlier this year) and the magnitude of losses gets downright horrifying.
Nio Will Keep Sinking
Simply put, like its batteries, NIO stock has lost its charge. Management has left the company’s investors with a defective vehicle. NIO has already declined from a peak of $10 to $3, but the losses can get even worse from here.
As Bank of America noted, the company could face grave difficulties in accessing more capital. With its funds on hand likely to run out by year’s end, this is not an insignificant problem. The company is projected to run massive losses in 2020 and 2021, so it may be hard to convince creditors to extend Nio another lifeline.
As the recent layoffs demonstrate, Nio is in deep trouble right now. Investors could lose a great deal more in the coming months if they hold onto the stock. Nio’s bonds are already trading down to just 50 cents on the dollar, implying that there is a major chance of the company’s creditors suffering a big loss. In that event, NIO would be nearly worthless.
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.