Chinese premium electric car manufacturer Nio (NYSE:NIO) reported its Q2 earnings before the bell on Tuesday morning. In anticipation of bad news, skittish investors had driven Nio stock to a 10.5% loss on Monday.
When those Q2 results came in, the situation quickly became even uglier, and that Nio stock price cratered, dropping as much as 25% before ending Tuesday down 20%.
Nio Stock Battered by Q2 Earnings
Investors in NIO have probably not been happy with how the company’s stock has performed so far in 2019.
Up until last Friday, they had seen a 52% decline in the value of their investment so far this year. With the company scheduled to deliver Q2 earnings on Tuesday morning, nervous investors who were fearing the worst bailed on Nio stock. By the time the bell rang on Monday afternoon it had taken a whopping 10.5% loss on the day.
When NIO posted its Q2 earnings report early Tuesday morning, it had the immediate effect of driving the company’s stock down further in pre-market trading. And when the markets opened, things quickly got worse
NIO beat analyst expectations on revenue, but reported wider than expected losses, along with other bad news for investors.
Total revenue for the quarter of $219.7 million was better than the expected $185 million, but the net loss of $478.6 million was 25% higher than the same quarter last year. Gross margin was negative 33.4%, much worse than the negative 13.4% reported in the first quarter.
In addition, the company says it is going to continue layoffs, with the target of reducing its headcount to 7,800 by the end of the third quarter from the 9,900 it was at in January.
NIO also says it will be pursuing “additional restructuring and spinning off of some non-core businesses by year-end.” The company’s chairman and Tencent Holdings are loaning the company $200 million, with its cash dwindling to just $503.4 million from the $1.12 billion it had three months ago.
In the face of the selloff, the company canceled its Q2 earnings call altogether.
Why the Pessimism?
Nio was hit by a series of challenges in Q2 — some of its own making, but some that were completely out of its control.
Nio’s ES8 luxury electric SUV was hit by a product recall due to several battery fires. The focus on addressing this issue (and undoubtedly the negative press that resulted from the widely reported battery fires) resulted in the company delivering just 837 new vehicles in July. That was a big drop from the 1,340 it delivered in June.
Besides the self-inflicted battery woes, Nio has also been up against market forces that it has little influence over. High on that list is the trade tensions between the U.S. and China. Investors have worried that tariffs will cool the Chinese economy, and hit the sales of luxury cars as a result. On top of that, automobile sales in general have been cooling for over a year.
In July, the company issued a press release where it outlined some of the challenges to its business:
“China’s macroeconomic and auto market conditions remained challenging, exacerbated by the U.S.-China trade conflict and the decline in passenger vehicle sales on a year over year basis for 13 of the past 14 months.”
The final nail in the coffin for many Nio stock investors has been the Chinese government’s move this year to half the subsidies it offered to buyers of electric vehicles.
As the newly reduced subsidies kicked in, electric car sales took a hit. They were down 4.7% in July, and new data shows they went into free fall in August, dropping 16% year-over-year. The subsidy reduction has hit all-electric car makers, including Tesla (NASDAQ:TSLA), but it’s been particularly rough on NIO — which currently relies solely on the Chinese car market for sales.
A Dim Future for Nio Stock
Despite guidance for a sequential increase in vehicle delivery numbers of between 18.2% and 23.8% for Q3, and a sequential revenue increase of between 5.6% and 10.3% for Q3, investors were not impressed.
With terrible margins, a cash bailout, spin-offs and more layoffs in a Chinese electric car market that’s slumping, Nio’s future doesn’t exactly inspire confidence.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.