Chinese electric car manufacturer Nio (NYSE:NIO) began last week on a downward trajectory, losing nearly 8% by the time the bell rang on Tuesday. That’s a familiar story for NIO investors. But for the rest of the week, that Nio stock price was on the upswing and it ended Friday at $1.52, up from the previous Friday’s close.
Today, it is popping based on a new report of October car deliveries. Nio stock tanked after the company reported second-quarter earnings in September — dropping 51% in a matter of days and closing Oct. 1 at $1.32.
Now the stock is currently in a tepid recovery. But an awful lot has to go right for Nio for any recovery to actually gain traction.
Dismal Q2 Earnings
Nio released its Q2 earnings report Sept. 24 and it was a bloodbath. Among the highlights (lowlights?) for the quarter were wider-than-expected losses, a much worse gross margin than the previous quarter and the announcement that layoffs would continue in an effort to reduce headcount and expenses. Other cost-cutting measures included additional restructuring and a plan to spin off some of the company’s non-core businesses by year end.
The company was forced into dramatic cost-cutting because it was burning cash. Its reserves were down to $503 million from the $1.1 billion it had on hand just three months before. That cash situation was dire enough that NIO borrowed $200 million from its chairman and Tencent Holdings (OTCMKTS:TCEHY).
Needless to say, there was nothing there that investors liked.
October Deliveries Offer Brief Glimpse of Light
Nio stock got an unexpected double-digit lift on Oct. 8 when the company released a Q3 vehicle delivery update. The 4,799 vehicles delivered in the quarter — 2,019 in September alone — represented a 25% increase from the previous quarter and beat estimates. This morning Nio released delivery numbers for October. The 2,526 vehicles is up 25% from strong September deliveries.
Nio stock began to pop once that news hit the market. But big questions remain about the sustainability of this delivery streak.
China’s Economic Numbers Don’t Bode Well
Nio sells its electric cars in China — and that market is stumbling.
The trade war between the U.S. and China has begun to be a serious drag on the Chinese economy. In October it was reported that China’s economic growth had dropped to the lowest levels since 1992. Also in September, car sales in the country dropped again — the 15th monthly decline in the past 16 months. And with subsidies cut, China’s electric car market has been showing double-digit declines.
It will be difficult for a luxury EV maker like NIO to maintain sales momentum in that economic climate.
More Storm Clouds for Nio Stock
Adding to the challenges is the prospect of foreign competition. “There is a coming storm of competition for Chinese electric vehicle manufacturers,” according to Wharton management professor John Paul MacDuffie, who notes that nearly 500 manufacturers have now registered to make EVs in China. Together, their manufacturing capacity once all are online is enough to produce almost three times the current sales levels.
And what happens then? MacDuffie says a shakeout in the Chinese EV industry is inevitable, and it puts struggling manufacturers like Nio under further pressure.
“Before a shakeout comes some tough price competition, [along with] higher-end, technologically sophisticated competition from the multinationals. The big players — the ones with experience like BYD — are in a better position to survive a shakeout.”
Wary investors lack confidence in whether NIO will be one of the survivors. And Nio stock’s wretched performance for most of the year reflects that doubt.
The company has often been called the Tesla (NASDAQ:TSLA) of China, but analysts at least have mixed feelings on Tesla. Even at a buck fifty for a share, there are not many analysts suggesting that Nio stock is a buy.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.