It’s becoming the silly season for equities. That’s about the only way I can explain the recent run-up for Nio (NYSE:NIO) stock. Granted, shares have since come down from their “lofty” highs of mid-January. But the stock continues to be in positive territory over the last six months. And it leaves me wondering why.
Nio may have benefited from a Tesla (NASDAQ:TSLA)-fueled halo effect. But the “rising tide” motivation for owning a stock only fits if the underlying company is strong on its own merits. It’s hard to make that case for Nio.
Nio Is Starved for Cash
In January, InvestorPlace’s Ian Cooper made a compelling case to avoid Nio stock. At that time, even company executives were acknowledging that the company did not have enough cash on hand to provide the working capital the company would need for 2020.
Never fear, early in February, Nio was able to raise $100 million in a convertible bond offering. Under the terms of the deal, Nio will issue $70 million in convertible notes to an unnamed fund. The notes will have a maturity date of twelve months. However, the holder has the option to convert the notes into company shares at a price of $3.07 per American Depository Share (ADS) after six months.
According to the Nio press release, the balance of the sale was issued to another fund on similar terms.
Ok, but Nio is a growing company. Debt is part of the formula for growth, right? The problem is Nio appears to need the debt for survival, not growth. By many (albeit unconfirmed) accounts, the firm needed to make the offering in order to avoid defaulting on a $30 million coupon payment that came due on Feb. 1.
You Can’t Make This Stuff Up
That being said, even with the cash infusion, the company is having difficulty meeting payroll. There are conflicting reports but Bloomberg is reporting that Nio will be paying their January payroll on February 14. However, there are other indications that the company will not pay the January payroll until March. The company is also offering employees stock options in place of cash for year-end bonuses.
Nio cites the coronavirus and its related problems as the reason for the payroll delay. But that right now seems like a tragic coincidence. What this really seems like is someone taking out a payday loan but still being unable to pay their mortgage.
Lagging Vehicle Sales Hurts Nio Stock
Analysts were questioning how Nio’s sales would do after the Chinese government removed the subsidies. The company reported an 11.5% year-on-year drop in January sales. This was worse than its peers. Once again, the company is saying the coronavirus is partly to blame as it struggles to get production running.
While this holds more water than blaming the virus for a failure to meet payroll, it still misses the underlying issue. In December, InvestorPlace contributor Dana Blankenhorn wrote about Nio’s fundamental problem. Nio makes a high-end car for a low-end market . And Ian Bezek recently outlined how, despite the company’s recent efforts to cut costs, they still lose money on every car they produce.
Sometimes Early Adopters Don’t Make It to the Finish Line
In December, I compared Nio to a cannabis stock. Both are dealing with the problems of emerging industries. The cannabis industry is moving towards a new phase of consolidation. When this is complete, there will probably be far fewer companies then there are today.
The same is true of electric vehicles. Nio’s struggles are not a referendum on the viability of electric vehicles. They are a referendum on the company and its business model. I’m sure that in the short term, there may be some interesting trading opportunities for Nio stock. But as an investment, I can’t think of a reason not to say no to Nio.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.