Nio (NYSE:NIO) stock is down 86% from its 52-week high on March 5. Back in March, shares were changing hands at prices as high as $10.63 share. But now, Nio stock has fallen below the $2 price level.
On Oct. 8, the company released sales for the quarter ending September. Vehicle sales were up 35.1% from the prior quarter, but this does not necessarily mean a turnaround for NIO.
The company continues to have liquidity issues. With Nio posting not only operating losses but also negative gross margins, the company is likely bleeding cash. Unless the company receives another cash infusion, the company will have issues as a going concern going into 2020.
With this in mind, Nio stock is still a long shot that will not pay off. There are likely additional declines in store for Nio. Let’s take a closer look, and see why this stock is one you should avoid.
Recent News with Nio Stock
It is still unknown when the company will release Q3 figures. But in the meantime, we have Q2 results to work with. Results for the quarter ending June 2019 were released on Sept. 24. Vehicle sales were down 7.9% from the Q1 2019. Gross margins turned even more negative, falling to negative 33.4%, compared to negative 13.4% in Q1 2019.
Operating losses were $469.9 million With the company hemorrhaging cash, Nio needs nothing short of a miracle for things to go its way. But looking at the macro situation, things do not bode well for Nio’s future.
As InvestorPlace’s Will Ashworth wrote, China’s cut of their electric vehicle subsidy is a negative catalyst for the Nio stock price. In 2018, the Chinese subsidy for Nio’s ES8 was $9,500. By June of this year, the subsidy fell to just $1,600. Without government incentives, Nio will have a tough time selling cars in its home market.
As I have mentioned before, Nio’s finances make Tesla (NASDAQ:TSLA) look like a blue-chip stock. While the company has been given a financial lifeline from the likes of Tencent Holdings (OTCMKTS:TCEHY), the company likely needs more cash to survive.
The company’s reluctance to release Q3 results is telling. The company’s financial situation is likely worse than we know. So what’s the endgame? The company may survive, but the stock will likely see additional declines.
The Chinese government could take over the company wholesale. Bondholders could seize control of the company. The end result could be a combination of the two. Whatever the outcome, I expect the Nio stock price to go down to pennies a share.
The stock remains a lottery ticket. Based on valuation, investing in Nio is pure speculation.
Nio Has Much More to Lose
Even after an 86% decline, Nio remains overvalued. As I have mentioned above, they are not only unprofitable on an operating basis; the company posts negative gross margins. Without profit figures, let’s use enterprise value/sales (EV/Sales) to compare the company to peers.
Nio’s current EV/Sales ratio is 2.5. Tesla’s current EV/Sales ratio is 2.3. Why pay a slightly higher valuation for moribund Nio when you can buy Tesla? While Tesla is much larger (has less runway), Tesla is making big moves into China. Their “gigafactory” could start production as soon as this month.
While a Chinese company may have the edge against a “foreign” operator like Tesla, Nio is not first in line to benefit from economic protectionism. As I discussed back in September, there are four state-owned carmakers with higher EV market shares. One of these companies (JAC) is where Nio actually builds its vehicles. Any of these entities may end up taking over Nio’s operations.
I am doubtful Nio is even worth the value of its outstanding debt. As of Q2, the company has $1.56 billion in outstanding debt. The company reported $2.65 billion in total assets (most of which are tangible). But with continuing unprofitability, the company’s assets are likely lower than this figure.
The Bottom Line on Nio Stock
It’s too late to short Nio stock. The opportunity was there back in late summer. But with the stock well below $5/share, it is too much of a risk to short shares. While the Nio stock price is falling towards $0/share, the stock could see a bounce back.
But on the flip side, this is no stock to go long. The company’s released financials are terrible and have likely deteriorated throughout Q3. We are in the dark with regards to the most recent quarter. But when the company releases these results, additional sell-offs could occur.
Avoid this stock. If you want to play the electric car story, you are better off with stocks like Tesla. If you want Chinese EV exposure, BYD Company Limited (OTCMKTS:BYDDF) gives you that opportunity. NIO is purely a fool’s bet.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
