Shareholders of Chinese electric vehicle maker Nio (NYSE:NIO) have gone on a wild ride over the past year. Nio stock traded around $6 per share, but spiked to $10 following a glowing 60 Minutes report about the firm last spring.
Nio’s promise quickly faded, however, as massive operating losses weighed the company down. Nio stock proceeded to lose more than 80% of its value.
Since the lows, however, Nio has bounced from $1.20 to as high as $5 per share. It’s been a remarkable recovery for the embattled firm. Or at least it was.
However, the coronavirus outbreak has ended the party. Nio stock slumped as much as 25% off its recent peak, though it has started off this week with a bit of a rebound thanks to the massive short squeeze in rival electric vehicle-maker Tesla (NASDAQ:TSLA). Still, it seems Nio’s momentum is fading.
China Rally Has Turned to Panicky Selling
Since December, Chinese stocks were absolutely soaring. And it made a lot of sense at the time. You had the new trade deal announcement between the U.S. and China that finally started to simmer down trade war tensions. Global stock markets had been advancing, and now China was set to join the party.
Big-cap tech names moved higher, while more speculative Chinese stocks like Luckin Coffee (NASDAQ:LK) blasted off. Luckin stock moved from $19 in mid-November to $50 in mid-January. However, Luckin’s shares have already crashed back to the mid-$30s within a few days on coronavirus fears along with short sellers throwing detailed fraud allegations against the company.
Luckin’s problems are a microcosm of the broader uncertainty around China. It’s easy to put doubts aside when stocks are going up. But the coronavirus has cast a harsh spotlight on China’s data collection and openness with the world.
The vast amount of uncertainty about the virus’ spread reminds us how different things are there verses in the U.S. And that sort of reflection bodes poorly when considering a company like Nio, that loses gobs of money and has a flimsy balance sheet.
Does Nio Have Cash to Survive?
If you look at online chatter, folks have been speculating about whether Nio even has the cash on hand to pay interest on its convertible bond. It has a payment of $16.9 million due on February 3rd, and, as of this writing, it’s unclear if Nio paid on time.
It may be able to delay payment given the business shutdowns in China thanks to the coronavirus. Normally, however, a small interest payment should be no big deal, right?
However, as the Financial Times noted in January, using Nio’s latest financial figures, the company was in poor financial health by the end of September and seemingly didn’t have enough cash to make it past year-end 2019.
Now, to be fair, Nio has been cutting costs. But that will only get you so far, particularly when the company has negative gross margin on its cars. That’s right, it loses money on every vehicle it sells before accounting for any overhead, marketing, or other such expenses.
With its cash nearly if not already depleted and it losing vast sums of money in the ordinary course of doing business, how long will Nio be able to fend off disaster?
Coronavirus Is Disastrously Timed
Given Nio’s desperate financial situation, the company needs cash as quickly as possible. Two of the easiest ways to bring in more cash would be from selling more vehicles, or from launching a new financing deal.
However, the coronavirus is likely to put a damper on both of those for at least a few weeks. Major companies such as Hyundai and Foxconn are halting their Chinese production for the time being. With the virus still spreading at a rapid clip, it seems unlikely that factories will be going at full blast again in the near future.
Similarly, Nio is unlikely to enjoy much retail demand either. Remember how Nio has built its huge and expensive network of Nio House locations to help promote their vehicles? Unfortunately, that overhead remains, but it’s unlikely that many customers will be swinging by Nio’s retail centers in the near-term either. Nio doesn’t have the luxury of time to fix its problems, and the virus will pressure the company further.
Nio Stock Verdict
Last month, I wrote that investors shouldn’t “confuse a short squeeze for forward progress.” As the rapid rise and equally quick decline in NIO’s stock price lately shows, little has changed fundamentally in recent weeks.
It’s been fascinating to watch Nio stock as a trading vehicle. For nimble swing traders, there have been plenty of opportunities, but don’t mistake that for Nio being an acceptable investment.
The trading fun could end at any point if Nio misses a bond payment or otherwise falls short of its cash needs. The company needs to lay out a clear strategy for stemming its cash burn and raising enough liquidity to make it through this shortfall, particularly with the coronavirus crushing revenues in the short-run. Until then, there’s not enough credibility to justify holding NIO stock.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.