When it comes to automotive companies, funding is a major concern. A worry about cash is the very thing that sent Tesla (NASDAQ:TSLA) plunging lower last summer, and new funding is exactly what revived it. Will Nio (NASDAQ:NIO) stock undergo a similar transformation?
Nio stock surged 13.4% on Tuesday, when the S&P 500 and Nasdaq each fell close to 3%. Nio’s shares also overcame the fact that auto deliveries have grinded to a halt in China. The rally was sparked by a report that Nio was in talks about a deal to obtain 10 billion yuan, or roughly $1.42 billion, from the Chinese city of Hefei. The company subsequently reportedly signed a preliminary deal to receive funding from the city.
The funds will help the company cover its operating expenses and overhead. Businesses need a tremendous amount of resources to get off the ground. And automakers’ overhead is even higher than most other types of businesses.
Nio has had to operate at a loss, as it manufactures and develops its electric vehicles. If it does secure new funding, Nio stock could get quite a lift.
Before diving into the fundamentals a little more, let’s look at the stock’s charts.
Trading Nio Stock
Nio stock is trading surprisingly well. Remember, in October, when investors feared Nio would not have enough cash to fund its operations, its shares were trading below $1.50. An additional 10 billion yuan will help ease that concern, but until there is robust demand for Nio’s products, it may be hard for investors to be very enthusiastic about its business.
Although the chart does not seem to indicate how investors feel about the company’s future, the stock’s technical outlook is certainly improving.
Nio stock is staying above several uptrend marks, as well as all of its major moving averages. However, many investors sold the stock after its surge on Tuesday. I think there were two reasons for that. First, it was a very tough day in the stock market overall, making any rally hard to maintain. Second, Nio has struggled with the $5 mark over the past several months. Each climb to that area has been met by a selloff.
Going forward, the shares’ outlook is pretty straight forward. On a rally, see if Nio stock can breach and close above $5. If it can, the 2020 high of $5.65 will be on the table. Above that, and $6-plus is possible.
On the downside, I want to see short-term uptrend support (depicted by the purple line) and long-term uptrend support (depicted by the blue line) continue to lift Nio stock. Nearby is the 50-day moving average, currently at $3.72. If Nio fails to hold these marks, a decline to the 100-day and 200-day moving averages near $3 will be in play.
The Bottom Line on Nio
Unlike iQiyi (NASDAQ:IQ), which may very well benefit amid the coronavirus scare, Nio will not be helped by it. While the latest reports about a potential funding deal are positive and the stock’s charts look better, there are many fundamental concerns to worry about.
The company’s January deliveries disappointed investors, while management said its February deliveries would be hurt by the virus. Recent forecasts call for a 70% decline in industry auto deliveries this month in China. To what extent that will hurt Nio, I’m unsure. But it’s not good news.
Last quarter, Nio lost more than $350 million. Although it lost less money than in the previous quarter and in the same period a year earlier, it still lost a considerable amount of money. That’s particularly true for a company that has just $137 million in cash on its balance sheet, and $274.3 million in cash, cash equivalents, restricted cash and short-term investments. In its last quarterly press release, the company stated the following, (bold emphasis added):
“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. The Company’s continuous operation…depends on the Company’s capability to obtain sufficient external equity or debt financing.”
Essentially, Nio has to raise additional funds — and it’s trying to. In this environment, getting its hands on some cash may not be all that hard. But if its business doesn’t improve and its forecasts don’t look bright, no one will want to lend to Nio.
There is demand for Nio’s vehicles, but its financial outlook is not good. Speculative investors can bet on Nio stock as long as its charts remain bullish. Other investors should consider avoiding the shares.