Investors who find most stocks to be too tame might be tempted to buy shares in Chinese electric vehicle maker NIO (NYSE:NIO) since it trades at a 533% discount to its average 52-week price target. Unfortunately, NIO stock is “cheap” because it’s on the brink of insolvency.
The Chinese government in May gave NIO a $1.45 billion lifeline through a joint venture with the state-owned Beijing E-Town International Investment and Development company. CEO Bin Li and outside investor Tencent Holdings (NASDAQ:TCEHY) stepped up in September, agreeing to buy $200 million in convertible notes issued by the company. Even so, analysts argue that NIO will need even more money to avoid a financial collapse. As of June 30, NIO had $503.4 million in cash after spending $620 million in the second quarter.
Financial Lifelines Haven’t Been Enough
Though some pundits argue that the Chinese government will open up its checkbook to NIO, the demise of “China’s Answer To Tesla” would hurt the “brand” of the Communist country. However, Beijing doesn’t want to waste its money either, especially on a company that has lost $5.7 billion in the 15 years it’s been in operation. Wall Street also is skeptical that better times lie ahead the EV maker since NIO stock has slumped more than 60% since January.
During the most recent quarter, NIO reported a worse-than-expected loss of 3.3 billion yuan ($478.6 million) as the company was hurt by cuts in subsidies from the Chinese government. Not surprisingly, NIO has announced plans to trim 14% of its workforce. The woes don’t stop there.
The company’s massive recall of 20% of all the vehicles it sold, after batteries caught fire, undermined consumer confidence. Though deliveries rose 35% during the third quarter to 4,799, NIO’s market share in its home country is only 1%. That’s surprising since NIO’s sport utility vehicles costs about $50,000 to $70,000, half the price of a Tesla. NIO stock also is a favorite of short-sellers who hold nearly 30% of the company’s float.
China’s Red-Hot Economy is Slowing
Tesla (NASDAQ:TSLA), among others, is eager to expand its foothold in the most populous country. The U.S.-based company recently began making vehicles for the China market at its gigafactory in Shanghai. The macroeconomic picture in China also is murky as growth has slowed. According to Bloomberg, profits at Chinese industrial firms fell a record 9.9% in October.
Let’s not forget the abrupt departure of Chief Financial Officer Louis T. Hsieh in October and the surprising cancellation of its earnings conference call. These two incidents would be red flags signals to investors to avoid NIO stock. This company, however, has a flag factory full of them.
As of this writing, Jonathan Berr did not have a position in any of the aforementioned stocks.