Nio (NYSE:NIO) has shown signs of life this week. The NIO stock price has risen 54% in just two sessions after two pieces of what appear to be good news.
This week’s news doesn’t change the core problem here: Nio is unprofitable and running out of cash.
The Cash Problem for NIO Stock
I wrote in September that Nio’s burn rate suggested the company had less than a year’s worth of cash left. After the company’s second-quarter earnings finally were released later that month, the news looked even worse.
Nio finished its second quarter with just over $500 million in cash and cash equivalents. The figure declined over $600 million during the quarter.
To be sure, that doesn’t mean Nio is going bankrupt this quarter. The company is trying to control costs by opening smaller showrooms and laying off staff. And the company is trying to raise additional capital as well.
But there are problems on both fronts. Nio can control its spending — but that’s not getting the company to profitability. Indeed, Nio said on its Q2 conference call that even gross margins for the rest of the year would be negative. It obviously can’t cut operating expenses to zero, or anywhere close.
Those operating expenses, even excluding non-cash stock-based compensation, totaled over $380 million in the second quarter alone. Even sharp cuts still suggest that Nio is burning at least $200 million a quarter, at least.
Meanwhile, Nio’s efforts to raise capital seem stalled out. Reports from Chinese media suggest a local government-backed away from an investment that would allow Nio to manufacture its own cars.
Its CFO departed the company last week, an odd move if the company was in the middle of lining up financing. Nio did raise $200 million in a convertible bond offering from its chairman and Tencent (OTCMKTS:TCEHY), but that cash at current burn rates will last for less than a quarter.
There is a very real bankruptcy risk here, and the two pieces of news this week hardly change that problematic fact.
A Deliveries “Beat”
NIO stock gained 12.5% on Monday after the company updated its deliveries for October. Nio delivered over 2,500 vehicles, 25% more than it did in September.
That may be good news in terms of demand. But it may not be good news in terms of the cash situation. As more than a few bears have commented, Nio is operating along the lines of the old joke: it’s losing money on every car and trying to make it up on volume.
Meanwhile, the October deliveries may be higher than those the month before. But 2,500 a year is nowhere near enough to get Nio anywhere close to profitability. Competition remains intense – there are nearly 500 electric vehicle manufacturers in China — and government subsidies are being eliminated.
The October figure simply doesn’t change the case here all that much, if at all. Nio has a lot of work left to do, and potentially not much time left in which to do it.
The Intel Deal
It’s not clear why investors are so optimistic. Mobileye is providing designs for an autonomous vehicle that Nio supposedly will manufacture. But Nio at the moment has nowhere to actually manufacture it. (It uses a state-owned company as a contract manufacturer.)
It’s possible that the same investors who erroneously see Nio as the Tesla (NASDAQ:TSLA) of China see the Mobileye deal as part of an autonomous strategy that will echo that of its U.S. counterpart. That’s simply not the case — at least not yet. Indeed, Tesla is now one of Nio’s many challenges in the market.
The Mobileye deal doesn’t change the case for Nio. Intel’s name seems like a potential validation of the company, but Intel/Mobileye aren’t taking any risk. And with that company apparently well behind the likes of Nvidia (NASDAQ:NVDA) in AVs, it has little to lose.
Unfortunately, that’s not the case for investors in NIO stock. The bounce this week seems unlikely to last. Once investor attention returns to the company’s precarious position, NIO shares will resume their downward slide — and there’s still a material chance they won’t stop falling until they reach zero.
As of this writing, Vince Martin has no positions in any securities mentioned.