Chinese premium electric vehicle maker NIO (NYSE:NIO) popped about 20% on Feb. 25 despite looming concerns over the coronavirus from China. The pop in Nio stock came after the company announced that they had secured 10 billion yuan in fundraising from Hefei’s city government.
That’s a huge deal for NIO. Heading into 2020, there were two central components to the bull thesis on NIO stock.
First, the company’s delivery and revenue trends would improve on the back of recharged electric vehicle demand in China. Second, the company would shore-up its cash-strapped balance sheet with new financing.
The first component of that bull thesis has been challenged in early 2020 amid the coronavirus outbreak. So, NIO needed the second component to come through. And it just did, in a big way.
Ultimately, NIO securing financing to shore up its balance sheet lays the foundation for NIO stock to sustain strength in 2020. That’s because, come mid-2020, the coronavirus outbreak will be put to bed. Auto demand in China will go through a v-shaped recovery, and the first component of the NIO bull thesis — rebounding delivery and revenue trends — will start to fire on all cylinders.
Thus, over the next few months, the two things that NIO needs to come through in order for the stock to work in 2020, will come through. In a big way. NIO stock will push higher. Also in a big way.
Funding Secured Stops the Bleeding
One of the biggest concerns with NIO in 2019 — and a big reason behind the stock’s 40% decline last year — was that investors questioned the company’s ability to keep the doors open.
Specifically, NIO didn’t have much cash on the balance sheet at the start of 2019, about 3.1 billion yuan. They were blowing through that cash rather quickly. By the third quarter of 2019, the cash balance had dwindled to 980 million yuan, for a quarterly cash burn rate that amounted to about 720 million yuan per quarter. At that cash burn rate, and without additional financing, NIO would be forced to shut down shop at some point in 2020, or tap the debt markets in order to keep operations up and running.
You can forget those concerns now.
NIO just secured 10 billion yuan in financing from the Hefei city government. That’s a lot of money. Now, the cash coffers are up near 11 billion. Even if NIO continues to burn 720 million yuan each quarter, it would take about four years for NIO’s cash resources to be depleted.
Big picture: NIO’s liquidity concerns have been erased, or at the very least, significantly delayed. With those concerns now easing, a huge weight has been lifted off of NIO stock, paving the path for shares to keep running higher.
Delivery Trends Set to Rebound
The other big concern with NIO stock in 2019 was that the company wasn’t selling enough cars. This concern, too, will vanish in 2020.
Right now, auto demand in China is falling off a cliff. Amid the coronavirus outbreak, Chinese consumers are barely leaving their homes, let alone buying new cars. Consequently, NIO’s first quarter numbers will look a lot like the numbers from 2019 — declining delivery volumes and revenues and wide losses.
This will all change come second quarter.
The coronavirus outbreak has already peaked in China. The number of new reported cases per day has come in well below 1,000 for several days in a row, marking a significant deceleration from earlier February when thousands of new cases were being reported every day. Even further, warmer weather will help “kill” the virus. So will broader distribution of Gilead’s (NYSE:GILD) remdesivir treatment, which is apparently working in treating coronavirus patients.
The base case here, then, is that by April or May, the coronavirus outbreak will be over. When it does come to an end, auto demand in China will come roaring back, supported by fiscal stimulus from the People’s Bank of China, easing U.S.-China trade tensions, and pent-up consumer demand. In a resurgent auto market, electric vehicle demand will soar higher, additionally supported by the end of electric vehicle subsidy cuts from the Chinese government and the introduction of Tesla (NASDAQ:TSLA) vehicles in the marketplace.
And, as electric vehicle demand soars, NIO’s premium electric cars will start to sell better. Delivery trends will improve. Revenue trends will improve. Profit margins will expand. Net losses will narrow. And the stock will cruise higher.
Bottom Line on NIO Stock
Funding is secured for NIO. Not in the way funding was secured for Tesla back in 2019. Rather, in a much more serious and real way.
This secured funding will ease liquidity concerns. Easing liquidity concerns will couple with rebounding delivery and revenue trends by mid-2020. This convergence will push NIO stock materially higher by the end of the year.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long NIO.
