Nio Inc. (NYSE:NIO) stock got a brief boost last week in the form of healthy third-quarter delivery update. However, the trend has remained bearish and I don’t expect any reversal in it. Nio faces multiple challenges that are specific to the industry as well as the company. These challenges would imply that Nio stock price continues to trend lower. This coverage will elaborate on the factors that will keep Nio stock depressed.
Starting with some industry discussion, new energy vehicle sales declined for the third straight month in China. Sales of new energy vehicles declined sharply, down 34.2% in September with cut in subsidies being a potential culprit.
Shenzhen-based BYD Company (OTCMKTS:BYDDF) is already feeling the heat with the firm expecting full-year net profit to decline by 43% due to subsidy cuts. An already-struggling Nio is no exception and delivery volumes will be hurt in the coming quarters due to the subsidy cut factor.
A Storm of Competition
As John Paul MacDuffie, a Wharton management professor observes, “There is a coming storm of competition for Chinese electric vehicle manufacturers.”
Professor MacDuffie also notes that “almost 500 manufacturers have registered to make EVs in China, and that they would together take the total manufacturing capacity up to 3.9 million vehicles annually, or about three times current sales levels.”
Clearly, ramping-up sales volumes amidst strong competition will be a challenge.
To elaborate on the competition: Tesla (NASDAQ:TSLA) will commence production in its China gigafactory towards the end of this year. Volkswagen (OTCMKTS: VWAGY) is reportedly boosting electric car production to one million vehicles in China by 2022. Ford Motor Company (NYSE:F) will be launching at least 10 new EVs in China in the next three years.
These are just few big names hoping to make inroads in the world’s biggest EV market. These are also car makers that are self funding and have ample financial headroom.
Nio Will Continue to Burn Cash
Nio is faced with an industry slowdown due to subsidy cutbacks. In addition, the company faces competition from local players as well as from those big global automobile companies.
In this scenario, Nio needs to accelerate delivery volumes as that’s the only way to lower operating level losses and prevent sustained cash burn.
This is the biggest challenge. I believe that Nio will need more equity infusion or leveraging to survive. For 2Q19, Nio reported operating level loss of RMB 3.2 billion ($455.4 million). For the same period, the company had cash & short-term investments of RMB 3.3 billion.
Clearly, if operating level losses sustain or widen, Nio will need another round of liquidity infusion. I see that as very likely and this will drive Nio stock lower in the coming quarters.
Higher competition also implies that R&D expenses will remain high along with increase in marketing & advertising expenses. The company aims to cut jobs, pursue leaner operations and spin-off non-core businesses. However, it might be too optimistic to believe that the impact will be meaningfully positive and operating losses will scale back significantly.
Bottom Line on Nio Stock
It is likely that Nio will launch a cheaper electric SUV, ES3 in 2020. Nio expects to sell 80,000 units of the ES3 in 2020 and up to 150,000 units in 2021. If this holds true, there is visibility for delivery volumes growth in 2020.
However, a cheaper SUV would imply relatively lower vehicle margins. I don’t see that as a concern if delivery volumes ramp-up in 2020 and 2021. The company desperately needs some positive triggers that can boost Nio stock.
Another development that will be closely watched on the business front is potential launch of Nio EVE. The autonomous electric car was slated for launch in the United States in 2020.
Overall, there are hopes in the form of cost cut, cheaper model launch and foray into autonomous cars. In the near-term, these are overshadowed by a slowdown in the EV industry coupled with fierce competition.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
