Nio Stock Is Extremely Cheap — But It Should Be Cheaper

2019 has not been good to Nio (NYSE:NIO). Sales have been underwhelming. The company continues to burn cash. And the NIO stock price has plunged, dropping 55% so far this year and declining 70%+ from early March highs. In today’s trading alone, it’s down 5.8% as of this writing.

The Nio Stock Price Should Be at an All-Time Low
Source: THINK A /

The pressure has continued of late after a brief rally in July. But, to be blunt, it really should be worse. Bad news is mounting. Nio’s very viability seems at risk in the near term. And there’s an important question at the moment that hasn’t been answered.

NIO might seem cheap. The stock, as noted, has pulled back sharply. It trades below $3. As bulls are wont to argue, Nio is the “Tesla (NASDAQ:TSLA) of China” — yet is valued at less than one-tenth its U.S. counterpart in terms of market cap.

But NIO isn’t cheap. The market still values the company around $3 billion including net debt. There’s little reason for even that valuation, particularly amid increasingly concerning news. This is a significantly challenged company in a hugely competitive market with macro worries layered on top. It can, and likely will, get worse for Nio.

A Bad Month for Nio, and the NIO Stock Price

Since August 2, the NIO stock price has fallen 17.4%. It’s declined 32.5% from intraday highs on July 10. Again, it really should be worse.

Indeed, the news surrounding the company over the past month or so has been dreadful. From a macro standpoint, there’s been no progress on the trade war front. And the yuan was devalued in early August, making Nio’s eventual profits (if they arrive) less valuable to U.S. investors. Chinese macro concerns remain, leading to volatility in even more established plays like Alibaba (NYSE:BABA) and (NASDAQ:JD).

From a company-specific perspective, the news in August was even worse. July deliveries of just 837 vehicles disappointed. The ‘retirement‘ of Nio’s co-founder followed two other key executive exits the month before. A week later, the company announced it was laying off 1,200 employees — nearly 14% of its workforce.

None of those news items suggest a growth company, which Nio has to be. The NIO stock price, after all, is still ~2x revenue (again, including net debt). That might sound cheap — but for a sharply unprofitable automotive company that doesn’t even manufacture its own vehicles, it’s not.

Rather, this sounds like a company that needs to save cash, has serious strategic questions, and isn’t selling nearly enough cars to come close to covering its expenses.

That in turn undercuts the argument that a trade war resolution somehow fixes Nio’s problems. There are 486 electric vehicle manufacturers in China, as Bloomberg noted earlier this year. That’s a competitive issue not a temporary geopolitical problem.

Where Are Earnings?

After all that bad news, there’s one odd piece of ‘no news’ at the moment: Nio’s second quarter earnings. Nio reports on a calendar basis. But more than two months after its quarter ended, the company still hasn’t even announced an earnings release date.

To be sure, that doesn’t necessarily mean anything nefarious. Bitauto (NYSE:BITA), also founded by Nio co-founder Bin Li, isn’t reporting until Thursday. But it does seem to suggest that at the least Nio doesn’t have much good news to report. It may also be that the company is working toward something else — perhaps a financing — before the release.

Again, this is a company whose current burn rate suggests it may have less than a year’s worth of cash remaining. That rate should moderate after the layoffs, to be sure. But any uncertainty for this kind of company seems like bad news. And it’s possible, with more trade war drama over the Labor Day weekend, that the lack of an earnings release will lead to more questions – and more selling.

Sell NIO

Wherever an investor looks right now, the news seems to be negative for NIO stock. The simplistic bull case here — that Nio can benefit from EV growth in China, particularly on the high end — in theory can still play out.

But industry leaders don’t lay off 13% of their employees. Co-founders don’t ‘retire’ to go work for a supplier. Earnings reports are released on time.

This is not the story that some bulls seem to think that it is. And at a market cap of $3 billion, that problem still isn’t priced in.

As of this writing, Vince Martin has no positions in any securities mentioned.

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