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Nio Stock Price Rallies but Don’t Expect It to Last

The Nio stock price rallied significantly in Q4 but challenges remain

Nio (NYSE:NIO) went public over a year ago, but the reception was chilly. The stock price was at the low end of the range of $6.25 to $8.25, and first-day performance was also lackluster, up only about 5%.

Down 86% Since March, Nio Stock Officially Has Become a Fool's Bet
Source: Carrie Fereday / Shutterstock.com

At the time, Nio backers touted the company as China’s version of Tesla (NASDAQ:TSLA). But that’s a tough standard to meet. And for the most part, Nio’s performance has been mostly disappointing, with returns at roughly -41% since the offering.

Now it’s true that NIO stock has rallied lately, going from $1.32 at the start of October to $4.02 by the end of 2019.

But why? The company had a better-than-expected earnings report, as vehicle deliveries jumped 35% from 3,553 to 4,799 units.

There were some other notable highlights:

  • The company announced its 100-kWh battery pack and 20-kW DC Power Home, meaning Nio cars will significantly improve in range.
  • Nio unveiled the EC6 smart premium electric coupe SUV, which can go from zero to 100 kph in 4.7 seconds with a range of 615 km.
  • The company announced the ES8 smart premium electric SUV, which has a range of up to 580 km.
  • Nio has been cutting costs to improve efficiency, including an 18.1% reduction in SG&A and a 21.3% decrease in R&D spending since Q2.

A Deeper Look at the Numbers

If anything, a big part of the surge in NIO stock was due to a short squeeze. Keep in mind that nearly 30% of the float ended up shorted.

But there are other factors to consider as well. For example, even with increased deliveries, revenue growth was only 22.5%. This is because newer models fetch lower prices but remain costly with negative margins. It seems increased scale will be necessary for Nio to break even.

This is particularly troubling since Nio has only $274.3 million in the bank, but the burn rate remains at $250 million or so. The company’s CEO, William Li, has agreed to invest $90.5 million in a convertible instrument, but even that might not be enough.

According to the company’s most recent filing with SEC: “The Company operates with continuous loss and negative equity. The Company’s cash balance is not adequate to provide the required working capital and liquidity for continuous operation in the next 12 months.”

In other words, Nio will likely need to return to the public markets — and soon. True, the company has existing investors like Tencent Holdings (OTCMKTS:TCEHY) that could easily write them a big check. Other strategic players may want a piece of NIO stock as well, but an investment would likely mean heavy dilution.

Something else to consider: China’s car market is soft because of the government’s recent slashing of EV subsidies. And there’s an increasingly diversified playing field, with competition from mega companies such as BMW (OTCMKTS:BMWYY) and Daimler (OTCMKTS:DMLRY).

But Tesla may pose the biggest threat to NIO stock. In just about a year, the company has set up a new factory that’s already humming along, producing 1,000 Model 3’s per week.

The Bottom Line on NIO Stock

No doubt, Nio’s cars are well-designed and China’s market is large. But Tesla’s entry will likely take the wind out of its sails. It also doesn’t help that Nio outsources its manufacturing, making it difficult to maintain quality control and generate positive margins.

So for now, especially after the big price swing — which was due in part to technical factors — it’s best to avoid NIO stock.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/nio-stock-price-rallies-but-dont-expect-it-to-last/.

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