Throughout 2019, investors fell out of love with Nio (NYSE:NIO) stock. As investors realized that the company’s performance didn’t match its hype, Nio stock fell from as high as $10.64 to as low as $1.19. But in the past two months, breadcrumbs of “good news”, along with a massive short-squeeze, have caused NIO to nearly triple from its lows.
The Nio stock price started its rebound in November. But after the company’s unaudited September quarter results were released on Dec. 30, Nio stock price took off like a rocket. Despite the company’s continued negative gross margins and operating losses, investors instead focused on its Q4 guidance.
After the company predicted that its Q4 deliveries would soar 67% versus Q3, propelling its top line 53% higher, many investors ran to buy Nio stock. With short covering adding fuel to the shares, Nio stock rallied 53.7% on Dec. 30, closing at $3.72.
Since then, NIO is little changed, as the shares rose 5.4% yesterday to $3.70. Is the recent rise of the Nio stock price a dead cat bounce? I believe so. After examining the company’s cash flow, I believe that it will most likely need to raise cash quickly to avoid bankruptcy.
Those shorting Nio stock were burned in recent weeks. But over the long-term, NIO remains a precarious stock to buy and hold. Let’s dive in and see why NIO is still unattractive.
Can NIO Even Stay Afloat?
Nio’s financials continue to be filled with red flags. For example, let’s look at the company’s cash situation. NIO provided preliminary Q3 results, but it did not offer any cash flow information. But on Jan. 7, The Financial Times performed a “back-of-the-envelope” analysis of the company’s cash flow.
According to the results, the company had $274 million of cash as of Sept. 30. That’s down from $491 million at the end of the prior quarter. But that understates the amount of cash the company burned in Q3. That’s because Tencent Holdings’ (OTCMKTS:TCEHY) $100 million convertible bond investment closed in Q3. Nio CEO William Li also invested $100 million in Nio’s convertibles, but the company did not start receiving the proceeds from his investment until Q4.
So simple math shows that Nio burned through around $317 million of cash during Q3. Add Li’s $100 million investment to the $274 million remaining as of Sept. 30, and the company had access to around $374 million of cash during Q4.
But we are now in Q1. How is Nio keeping the lights on? The company needs cash to fund its current operations! With these cash flow issues, how can Nio stock not only retain value, but go up significantly?
Debt Markets Tell Us All There Is to Know About Nio’s Future Prospects
The equity markets continue to imply that NIO stock is worth billions. But the debt markets tell another story. The company’s publicly-traded bonds currently go for around 47 cents on the dollar. That is significantly higher than where that debt traded in December. Yet it’s clear that the credit markets remain skeptical of the company’s underlying value.
The high discount of the company’s debt implies that bondholders are not confident they will be paid in full once the debt matures in 2024. In other words, they think there is a high likelihood of the company going through some sort of restructuring. In that scenario, the company’s equity would be wiped out. In other words, Nio stock would become worthless.
As InvestorPlace columnist Tom Taulli wrote on Jan. 9, Nio can probably avoid bankruptcy by selling more equity to Tencent or another strategic player. But additional equity will materially lower the Nio stock price.
Sell, Sell, Sell Nio Stock (But Be Careful)
As I close out this article, I must give a hat tip to private investor Jeremy Raper. He has provided ample ammunition that bolsters the bear case against Nio stock.
But while I remain bearish, it’s important to tread carefully with this highly-volatile security. As shown by the recent short squeeze, the Nio stock price can easily rally on just a breadcrumb of good news.
Bulls may be confident in the company’s future in the Chinese electric vehicle (EV) market. But to thrive, the company must outfox better-capitalized competitors like Tesla (NASDAQ:TSLA), as well as Chinese state-owned automakers. The odds remain stacked against NIO.
The bond market may be properly handicapping the situation. But Nio’s equity value could remain irrational longer than bearish investors can remain solvent. Don’t bet the ranch shorting Nio stock. On the other hand, in the next few weeks, negative catalysts could push Nio stock price lower.
The company is rumored to have delayed payroll due to a lack of cash. It also has a bond interest payment due on Feb. 1. As more cash flow issues bubble to the surface, they could have a negative impact on the Nio stock price.
Here’s the verdict: Those who are long Nio stock should take their profits, pronto! Investors who want to short NIO should strike while the iron is hot, but they must be careful!
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.