Electric vehicle manufacturer Nio (NYSE:NIO) has plenty of concerns. The NIO stock price is less than half of what it was at the time of the company’s IPO. The company is burning cash. The Chinese government has cut subsidies. Competition is significant already and should grow next year.
The last thing this company needed was for the trade war to escalate. That’s exactly what happened on Monday, however. In response to new tariffs, China devalued its currency, the yuan. The Trump Administration responded by labeling the country a currency manipulator and markets responded by plunging.
NIO stock wasn’t immune, dropping nearly 10% in trading on Monday. That takes a bite out of what had been a solid rally last month, backed by stronger-than-expected deliveries for June. NIO still is up 25% from June lows, admittedly but it’s also down 70% from early March highs.
The response on Monday doesn’t seem like an overreaction. Again, this remains a company with a number of problems and a stock with more than a few risks. I wrote in early June that the NIO stock price could head to zero, and though the stock rallied since, I still believe that’s the case. And trade war concerns may get the stock there sooner than previously thought.
Yes, the Trade War Matters
It might seem to some like NIO stock shouldn’t be all that affected by trade war concerns. After all, the company is purely a domestic player and will be for years to come. Global trade flows would seem immaterial.
But there are two reasons why the decline in NIO shares makes sense. First, it lowers the value of the stock outside the country. The company’s earnings are in yuan, and those yuan now are worthless in dollars to overseas investors.
More importantly, the risk is that a trade war could harm the Chinese economy. That, in turn, would hit vehicle demand – particularly for the high-end models made by Nio. The company’s ES6, for instance, has a starting price of $52,000. That’s a price tag that puts demand at risk if the Chinese economy slows down.
Both issues hit not only NIO stock but on Monday, but other Chinese issues. Alibaba (NYSE:BABA) fell 4.5%, and another 2%+ in after-hours trading. Baidu (NASDAQ:BIDU) dropped 7%. BYD Co (OTCMKTS:BYDDY), an old-line auto manufacturer with a big presence in EVs, dropped over 4% as well.
Admittedly, those declines don’t match the 9%+ fall in NIO shares. But when risks hit the market, it’s higher-risk stocks that take the biggest hit. Unquestionably, NIO is one of the higher-risk stocks in what is now one of the world’s higher-risk markets.
The Cash Problem for NIO Stock
But there’s a third reason why the trade war is important for Nio: the company is going to need money. The company ended the first quarter with $1.12 billion in cash on the books, which seems like a reasonable amount.
But the company posted a $372 million adjusted operating loss in the first quarter. At the same rate over the next three quarters, Nio would run out of cash by the end of the year.
To be sure, the company likely can pinch pennies to extend that burn rate, though investors should closely watch cash and loss figures in the Q2 release, due likely at the end of this month. But the company is a long way from being profitable: the operating loss was about 162% of revenue in the first quarter, and analysts expect sales to decline quarter-over-quarter in Q2.
Nio at some point is going to have to raise funds. And the plunging NIO share price makes an equity offering tough: even diluting shareholders 50%, at a likely discount to the current price, would only raise maybe $1.3 billion.
That’s about four quarters’ worth of cash at the moment. Debt raises are going to be difficult, if not impossible, particularly since Nio doesn’t own much in the way of assets. (It outsources manufacturing).
The trade war complicates any effort to raise capital. It also potentially could lead to further reductions in electric vehicle subsidies, which already have come down. A central government looking to protect itself in a tougher environment may decide to focus its spending elsewhere. And that would be troublesome for a company trying to sell cars for $52,000, or more.
Be Careful Out There
The broader point with Nio is simple. This is not, as too many observers and analysts blithely argue, the Tesla (NASDAQ:TSLA) of China. It doesn’t manufacture its own cars. Unit volumes remain paltry. Competition is ridiculously intense: as I’ve noted before, there are nearly 500 electric vehicle manufacturers in China. Tesla itself is on the way.
Now, being the “anything” of China looks like a problem. And that’s one more problem than Nio can afford right now.
As of this writing, Vince Martin has no positions in any securities mentioned.