At the start of October, Nio (NYSE:NIO) hit $1.32 a share. Keep in mind that the price was over $10 in March, but the $1.32 level would prove to be some type of support. Since then, Nio stock has seen a run-up, getting to $2.07.
The recent bull move in Nio stock doesn’t necessarily mean there’ s a real turnaround. In fact, the sentiment had gotten to such awful levels that any good news could spark a rally. And that’s just what happened.
First of all, the car deliveries for the third quarter came in at 4,799, which was better than expected. In fact, for October, there was a sequential jump of 25% to 2,526.
What’s more, Nio is optimistic about production for the next couple of years, as the company expects to launch its ES3 SUV (which is focused on the mainstream market). For example, the estimate is to sell 80,000 vehicles next year and 150,000 in 2021.
Next, Nio announced a partnership with Intel’s (NASDAQ:INTC) Mobileye unit, a developer of technologies for car safety and autonomous driving. The deal calls for Nio to help create and mass produce a system for level-4 self-driving for its own vehicles and ride-hailing services.
The Nagging Issues
While the latest news is encouraging, it’s still important the keep in mind that Nio still faces some tough challenges and headwinds. The latest earnings report certainly highlights this. There was a massive net loss, which was higher than expectations, and the margins showed continued pressure. Nio also announced more layoffs, departures of executives (including the CFO) and efforts to pair back on the costs.
Perhaps the most troubling part of the report was the dwindling cash balance, which dropped from $1.1 billion to $503 million! Given this burn rate, Nio will likely need to get another capital infusion. Now the company already has marque investors, such as Tencent Holdings (OTCMKTS:TCEHY), but equity financing will likely be highly dilutive to Nio stock.
In the meantime, the Chinese EV market has remained soft. Then again, the economy has remained under pressure and there are nearly 500 EV manufacturers. Interestingly enough, Tesla (NASDAQ:TSLA) plans to soon initiate production in China and Ford (NYSE:F) is also looking to ramp its efforts.
Finally, it does not help that the Chinese government has been pulling back on subsidies for consumer purchases of EVs, which has been another factor in dampening demand.
Bottom Line 0n Nio Stock
Over the next few years, it seems inevitable that there will be a shakeout in the Chinese EV market. There are simply too many players in the market and demand has been lagging. So for a company like Nio, it’s going to be tough to get traction because of the dwindling cash position and its relatively small market share.
Even though the Mobileye deal is a positive, the details are still fuzzy. Besides, autonomous driving technology has proven quite challenging, as seen with the efforts with mega tech companies like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Apple (NASDAQ:AAPL).
Granted, for Nio stock, there will likely be periodic rallies. But over the long haul, it will be tough to sustain the gains.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.