Nio (NYSE:NIO) stock has become a headscratcher.
The last time I weighed in on this electric vehicle stock, it traded at a high of $4.87. I even noted, “I’m not a fan of the stock with the EV market pulling back. You can find better opportunities elsewhere at the moment. This slow-motion train wreck will continue for the foreseeable future.”
The company was struggling to keep its head above water, given that Nio “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.”
Worse, the promise of a $1 billion cash infusion seems over-exaggerated. In fact, as I said in late January, Guangzhou said any potential investment would not exceed $150 million — $850 million less than the pipe dream of $1 billion.
Yet, the stock has done nothing but move higher. I remain unconvinced it’s time to buy.
NIO is Surging on Talks for $1.4 Billion in Funding
Shares of Nio exploded after the company said it was in talks for up to $1.4 billion in funds with the government of Hefei, a hub for automakers. Nio also pushed higher on plans to build headquarters, research and development and manufacturing facilities.
Reportedly, Nio is one of eight major deals the city is considering to support economic development. That’s great news for the near-term.
“We think the news puts speculation around NIO’s funding issues to bed — at least in the foreseeable future,” said Robin Zhu, an analyst at Sanford C. Bernstein Ltd. “We remain dubious over the company’s fundamental outlook, and remain concerned about Tesla (NASDAQ:TSLA) competition.”
Long-term, there are Doubts Over the Company’s Chances for Survival
Nio is still saddled with $1.5 billion of debt, and is expected to post negative free cash flow of $1.4 billion in 2019, says Bloomberg contributor Anjani Trivedi. Plus, as the company noted in its third quarter earnings, its “cash balance is not adequate to provide the required working capital and liquidity for continuous operations in the next 12 months.”
We must also be concerned about the impact of the coronavirus scare on auto buying in China.
“China’s car industry has never had to factor in so many negative issues — the challenges have been piling up,” says Cui Dongshu, secretary general of the China Passenger Car Association. “It will take months for economic activity to return to normal. People’s purchasing power will be undermined by falling incomes.”
Auto sales are expected to fall 25% to 30% for the January-February 2020 period thanks to the virus outbreak. It could even pull down China’s full-year auto sales by 5%. On top of that, the demand for EVs could be among the biggest to suffer because “sales of those vehicles are concentrated in the biggest cities, which happen to be the ones most affected by the virus outbreak,” says Robin Zhu.
The Bottom Line on Nio Stock
Financing of $1.4 billion may sound enticing to investors. Unfortunately, with a sizable cash burn rate, coupled with going concern issues, and the coronavirus, it’s best to avoid Nio. Should the company have something exciting in its next earnings release, perhaps I’ll change my mind.
Right now, I’m still bearish on Nio stock, and strongly advise investors to avoid it.
Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
