Despite Its Recent Rebound, Steer Clear of Nio Stock

All bets are off on NIO

After falling to prices as low as $1.19 per share, Nio (NYSE:NIO) stock is rebounding. And after reporting higher than expected deliveries, and launching a new partnership with Intel’s (NASDAQ:INTC) Mobileye, the Chinese electric vehicle (EV) startup appears to be better positioned.

Nio stock
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The Nio stock price has jumped over 100% from its low on Oct. 2. But at the current share price  of $2.40, Nio stock is down about 77% from its 52-week high. The company’s financial situation remains precarious. NIO reported its fiscal second-quarter earnings in late September. But based on those results, Nio’s situation doesn’t look good.

Nio has had some positive developments, but its past financial results have been poor.  As a result, all bets are off as to whether Nio stock will take off or crash and burn.

Let’s take a closer look and see why Nio stock  is too risky to buy, but also too risky to short.

Improved Sales, Autonomous Vehicle News Are Positive for Nio Stock

Pure speculation is driving Nio stock price higher. In the past month, NIO has issued several press releases in an effort to restore investors’ confidence in the company.

The first was its October delivery update, issued on Nov. 4. The company reported that its October deliveries had jumped 25% versus September to 2,526 vehicles.

The second crumb of good news was its collaboration with Mobileye. Owned by Intel, Mobileye is a big player in autonomous driving systems. NIO will use Mobileye’s technology to build “highly automated and autonomous vehicles” that will be sold in China and other markets.

The third item was the appointment of a new CFO. Former CFO Louis T. Hsieh resigned in October. The former CFO gave “personal reasons” as his rationale for leaving. But the sudden resignation of the CFO was worrisome. CFOs depart all the time, but when the company they leave is in a weak financial state, the Street naturally speculates about deeper financial problems.

The new CFO  came on board on Nov. 18. Since then,the  shares have bounced nearly 30%. But will the good news cause Nio stock price to bounce further? While the company could win big in a world of autonomous electric cars, it isn’t the only kid on the block.

Competition, Weak Financial Position Could Be Killers

There’s a lot of competition for a piece of the EV pie. And I’m not just talking about Tesla (NASDAQ:TSLA). The Chinese domestic EV market is highly competitive. The competition includes China’s main state-owned automakers.

The recent entry of Tesla in China only makes matters worse. Add in reductions of government subsidies, and the odds are clearly stacked against NIO.

Even after the shellacking the stock received, the shares are by no means “cheap.” NIO trades at an enterprise value-to-sales (EV/Sales) ratio of 3.3. By comparison, Tesla trades at an EV/Sales ratio of 2.9.

Granted, Nio stock could theoretically rally more than Tesla. Even if Elon Musk’s dream is fully realized, I doubt TSLA stock can jump 1000%, since its market cap today is $60.4 billion. But if Nio’s situation turns around and it”makes it,” the shares could skyrocket.

Clearly,no one will buy Nio stock based on its fundamentals. Like InvestorPlace’s Will Healy said in his Nov. 27 column, Nio is a “lottery stock”. Investors could win big if this long-shot goes wire-to-wire. However, as an outsider betting from the sidelines, its tough to “predict the unpredictable”.

The other risk for the Nio stock price is capitalization. While we haven’t seen Nio’s recent numbers, based on its prior results, NIO clearly needs money. Its last capital raise was back in September. At that time, it raised $200 million via a convertible note offering.

The company likely needs more cash going forward to fund its expansion.  While NIO could avoid bankruptcy, don’t expect it to happen without subsequent capital raises that will dilute the value of Nio stock.

Don’t Buy (and Certainty Don’t Short) Nio Stock

With the Nio stock price stabilizing, it’s tempting to jump in and gamble on it. But the company’s fundamentals indicate that isn’t a solid bet. NIO could win big in the Chinese EV space. But to do so, it must beat  better capitalized competitors and get its own financial house in order.

But, at the current price of Nio stock, it isn’t a good idea to  short the shares. The company could succeed, causing Nio stock price to rally to its prior highs. That outweighs the potential gains that those shorting NIO can realize from  bankruptcy and the shares going to zero.

Weighing all factors, I believe the smart move is to avoid Nio stock and look for better investment opportunities elsewhere.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned companies.



Article printed from InvestorPlace Media,

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