I want to like Nio (NYSE: NIO) stock. I really do. On the surface, Nio stock is exposed to two long-term themes that I really like–electric vehicles and China.
Unfortunately, the latest round of red flags from Nio this week is simply too much to ignore. At this point, thinking of NIO as anything more than a lottery ticket speculative bet is dangerous.
Red Flags and Nio Stock
Where do I even start? Nio just reported a larger-than-expected second-quarter loss. Nio is running out of cash. The company reported a $462.7 million loss in the second quarter. It also said as of the end of June, it has just $503.4 million in cash remaining.
The Chinese auto market has been weaker than expected this year. Chinese auto sales growth was negative for the 14th consecutive month in August. According to a senior official at the China Association of Automobile Manufacturers recently said auto sales for the next two or three years will be “low or small negative growth.”
Nio canceled its earnings call Tuesday after saying it needs $200 million in cash. To its credit, it held its earnings call Wednesday. But one can only wonder whether management would have held that call at all if not for the 20% drop on Tuesday.
This year, Nio laid off more than 2,000 workers. It closed an office in Silicon Valley. It bailed on a plan to build its own factory. Nio recalled 5,000 ES8 vehicles because of a fire risk. It also put production of its ET Preview electric sedan on hold indefinitely just months after unveiling it.
The cherry on top of all these problems is the ongoing U.S. trade war with China. Nio’s market is purely domestic. But if the trade war continues to weigh on China’s economic growth, demand for electric vehicles will suffer along with the rest of the Chinese economy.
It’s Not All Bad
On its delayed conference call, Nio management said its ES8 should get a sales boost when the company releases its 84kWh model in October. The company’s guidance implies more than 5% quarter-over-quarter unit shipment growth in the third quarter.
Bank of America analyst Ming Hsun Lee says Nio has also made efforts to control costs.
“NIO has taken effective measures to control costs and improve operating efficiency, including building NIO Spaces instead of NIO Houses, headcount cut, and spinning off non-core businesses,” Lee said.
Lee is also bullish on Nio’s recent efforts to replace its battery leasing program and focus on a cooperative partnership with Chinese banks to launch an auto financing program. Lee says that the financing program will help Nio better manage its cash outflow and help customers save money when buying a car.
Unfortunately, despite these silver linings, Bank of America has an “underperform” rating and $2.50 price target for NIO stock.
“We are positive on NIO’s various strategies to improve order wins and cash flow, while we maintain U/P as we believe consensus on vehicle shipment is still on the downside,” Lee says.
How To Play NIO Stock
Nio is operating in a high-growth market in the largest emerging market economy in the world. Yet its business is absolutely floundering.
With NIO down 40.1% in the past week, it may seem like there’s nothing to like about the investment. But the fact that Bank of America values the stock at $2.50 per share despite its “underperform” rating is actually somewhat encouraging given the stock is now trading at just $1.81.
At this point, I see a binary outcome. If Nio survives, the stock could easily be a 10-bagger with more than 1,000% upside in the long run. But it’s looking increasingly precarious for the company given its financial problems.
All things considered, I don’t think it’s a crazy idea to buy NIO at under $2 per share. The key to investing in the company at this point is understanding that you are essentially buying a lottery ticket.
Buying NIO at this point is a bet that everything about the company, its management and its financial situation will take a dramatic 180-degree turn at some point in the near future. If you’re investing in the global transition to electric vehicles, NIO may not be your best play. If you’re looking for a lottery ticket with a decent chance of paying off, NIO stock is a speculatory bet with tremendous upside if it gets its act together.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.