Nio (NYSE:NIO) stock has been battered after the company reported second quarter 2019 results. Weak results were expected, but with Nio missing on EPS estimates, the stock slumped. It is also worth noting that Nio stock has crashed by 35% in the last two weeks and currently trades at $2.15.
Nio posted a loss of 45 cents per share against an expected loss of 18 cents. Revenues of $219.7 million beat expectations of $184.6 million.
I am of the view that the stock is oversold in the near term and a rally is likely soon. While I am bearish on Nio stock for the long term, there are some positives that can trigger a brief rally. This coverage will discuss the reasons to buy Nio at current levels.
Vehicle Margin Likely to Improve
For 2Q19, Nio reported a negative vehicle margin of 24.2% as compared to a negative vehicle margin of 7.2% in 1Q19. However, the number is slightly misleading. Excluding the recall cost, the vehicle margin was negative 4.0% for 2Q19. Therefore, there has been an improvement on a quarter-on-quarter basis.
It is also important to note that deliveries in July were weak at 837 vehicles due to voluntary battery recall, which was prioritized over new production and deliveries. However, deliveries in August increased to 1,943 vehicles.
For 2Q19, the company’s total deliveries were 3,553 vehicles and Nio expects 3Q19 deliveries at 4,200 to 4,400 units. Therefore, I expect vehicle margin to improve further on robust deliveries.
Of course, it does not imply that Nio will be positive at operating levels, but there will be some optimism if vehicle deliveries and margins improve.
Margin Improvement on Cost Cutting
I believe that Nio will be focusing on increasing vehicle sales volumes and that can potentially come through ES6. The company is ramping up production of the 5-seater premium SUV, which had delivery of 413 units in 2Q19. Higher sales volume is one factor that can support margin improvement.
The second factor is cost cutting. The company expects total employee headcount at 7,800 by 3Q19 from 9,900 in January 2019.
Additional restructuring and spin-off of some non-core business is in the agenda for 2019. While investment in R&D is critical, Nio is looking at cutting cost on other fronts to minimize cash burn.
The impact will be visible in the next 2 quarter and this expectation can prop-up Nio stock from current oversold levels.
Challenges Sustain For Long-Term
Nio stock price can trend higher in the coming weeks as market consider the near-term positives in the form of higher sales in 3Q19 and aggressive cost cutting measures. However, Nio is still far from being positive at operating level and reporting positive cash flows.
The company does have ample liquidity buffer for the foreseeable future. The convertible note offering ($200 million) to Tencent (OTCMKTS:TCEHY) and Mr. Li Bin, chairman and chief executive officer, will provide additional cushion.
However, I had discussed in an earlier article on the intensity of competition in China in the EV industry. Competition amidst macro-economic headwinds will make sales growth challenging for Nio.
I believe that the next 12-24 months will be critical for NIO stock. During this period, there will be bankruptcies and consolidation in the industry. It remains to be seen if Nio can survive.
During this horizon of 12-24 months, players like Tesla (NASDAQ:TSLA) and Ford (NYSE:F) will be aggressively pushing for market share growth in China. It’s a matter of survival for Tesla or Ford as much as it is for Nio. Therefore, it’s the fight to the end for survival and I see Nio as a relatively weak competitor.
Final Thoughts on Nio Stock
I expect Nio stock to move higher in the near term after a massive selloff. The company does have a brighter outlook for 3Q19 and that should provide some near-term bullish sentiment. In addition, the liquidity lifeline in the form of convertible note adds to the liquidity buffer.
However, the challenges for Nio are far from over. If Nio stock price does trend higher by 15% to 20% from current levels, it would make sense to book profits.
The key challenge for Nio will be to report positive results at operating level. Considering the macroeconomic scenario, competition and vehicle sales volume, I don’t see that happening anytime soon.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
