NIO (NYSE:NIO) stock is not going to last past this quarter. It will have run out of cash. You should expect that your stake in Nio stock will not survive without serious dilution or a takeover past this quarter.
I have written several articles in the past on NIO indicating that the company is effectively insolvent. In late October the CFO resigned. There has been no news on any kind of financing. In fact, NIO has not even produced its Q3 financial reports, two months into Q4.
I estimate that NIO probably entered Q4 2019 with only $300 million or so in cash, but it has been losing over $300 million a quarter in earnings, and probably more in cash flow. NIO does not report its quarterly cash flow numbers.
As a result, it is likely one of NIO’s shareholders or major clients will make a low-ball bid for all of NIO. Or they could offer to finance the company with debt that would essentially dilute shareholders with associated warrants or convertible features.
On Nov. 4, 2019, NIO announced that it had delivered 35% more cars than the second quarter. That probably exacerbated its cash outflows, since it is not even clear yet whether the company is gross margin profitable.
On Nov. 17, 2019, a new CFO was appointed. But NIO has still not produced its Q3 financials, confirmed whether a prior announced $200 million convertible debt deal was closed, nor indicated how it will finance its operations going forward.
This is an indication that it cares little about its existing shareholder base. In fact, at one point, NIO abruptly canceled its Q2 earnings conference call only to reschedule it days later.
The Future and NIO Stock
Tencent Holdings (OTCMKTS:TCEHY) owns 13.3% of NIO stock and 21.3% of its voting power. In addition, they have a board seat. This is based on page 124 of NIO’s annual report filed with the SEC, Form 20-F. It is likely they are the natural buyer for the company.
But Tencent doesn’t have to be in any rush to buy the company. Their market value is over $400 billion. NIO’s market value is $2.4 billion. So the economic value of their stake in NIO stock, worth $346 million, is meaningless. NIO stock is probably worth more to them dead or bankrupt. They could then buy the NIO assets with no associated liabilities for a similar amount as their existing NIO stock.
Mobileye, a ride-hailing technology company acquired by Intel (NASDAQ:INTC) recently signed a deal with NIO. They want NIO to produce Level 4 autonomous cars in China for Mobileye. So it seems they have a vested interest in making sure that NIO survives. A number of other Chinese auto companies, including battery companies, might also have such an interest.
I suspect that any takeover significantly above $2.00 per share is unlikely. That is because NIO has about 1.02 billion shares outstanding and its net assets are likely not worth more than $2 billion. This is because the amount of financing NIO will need until it is profitable will be significant.
What Should Investors Do?
If you already own NIO, you essentially are stuck now. You are probably afraid to sell in case a deal is announced at a higher price. On the other hand, without further financing, the company will go into bankruptcy. At that point, NIO will be worthless. So you are stuck in a gamble.
If I were to put odds, I would say there is probably some value to a number of companies to make a takeover offer. This is because the process of bankruptcy buying is very messy. And intellectual assets will walk out the door if that happens. At least with a takeover, you have the chance of keeping the company together to make a profit in the future. So I suspect a takeover offer is more likely than not.
However, I don’t recommend anyone buy NIO stock without a clearer vision of how the company will finance itself. This is essentially speculative investing at this point. There is no margin of safety here. Buyer beware.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.