How to Play NIO Stock Following Another Earnings Disappointment

NIO stock investors are running out of time

I still have high hopes for Nio (NYSE: NIO)  in the long-term. But no matter how much I want to buy Nio stock, the company has consistently given me reason after reason to stay away.

How to Play NIO Stock Following Another Earnings Disappointment
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The latest poor showing came last week when the shares once again tumbled following a lackluster fourth-quarter earnings report. Here’s a closer look at the fourth-quarter numbers, a recap of why investors should be wary of the stock and my take on how to play it from here.

Nio reported $409.1 million in fourth-quarter revenue, up 55.1% from the third quarter but down 17.1% from a year ago. Nio also reported an adjusted loss of $404.1 million, up from $344.6 million in the third quarter but down from the $465.6 million loss it reported a year ago.

That net income translated to a non-GAAP loss of 39 cents per American depository receipt, wider than the 26 cent loss analysts had been expecting. Revenue was slightly above consensus analyst estimates.

Nio’s cash balance is much more critical for the stock’s near-term outlook. Cash and cash equivalents were $151.7 million, down from $274.3 million one quarter ago.

Nio reported 8,224 vehicle deliveries in the fourth quarter, up from 7,980 a year ago. Full-year 2019 deliveries of 20,565 were up 81.2% compared to 2018.

Unfortunately, the COVID-19 outbreak has Nio’s 2020 numbers looking abysmal. Nio reported an 11.5% drop in January deliveries and a 12.8% drop in February deliveries. In fact, Nio delivered just 707 total vehicles last month.

For the full first quarter of 2020, Nio guided for deliveries of between 3,400 and 3,600, down from 3,989 deliveries a year ago. Nio also guided for $173.7 million in revenue, down from $243.1 million a year ago.

Nio’s Financial Problems Continue

In a nutshell, investors got more of the same last week. There was no surprise that first-quarter guidance was weak given the outbreak, but that doesn’t excuse wider-than-expected fourth-quarter losses. Nio is a cash-burning machine. Unfortunately, its growth has dried up in recent quarters, leaving a stagnant company that is hemorrhaging money.

In its earnings report, Nio said it raised $435 million in dilutive private placements in February and March. Once again, Nio has come up with the funds to keep the lights on. On the earnings call, management said it is making efforts to cut costs, improve its efficiency and increase its cash flows. Again, more of the same.

Since the beginning of 2019, Nio has raised $1.28 billion in funding, all of which came at a steep price for shareholders.  In February, Nio announced a vague $1.42 billion “collaboration framework agreement” with the municipal government of Hefei, Anhui China. As part of the agreement, Nio said it will “establish NIO China headquarters, further expand its operations and deepen its relationship with local ecosystem partners in Hefei,” whatever that means.

Nio’s most recent round of fundraising came following reports that its employees’ paychecks were recently delayed due to funding issues.

More Troubles Ahead

Anyone who hasn’t been living under a rock in the past month knows that now is not the time for a weak balance sheet. Nio has one of the weakest in the market.

Bank of America analyst Ming Hsun Lee says Nio’s expectation for vehicle margins to turn positive in the second quarter of 2020 is a positive sign that its business fundamentals are improving. Management also said it expects battery and other component costs to continue to fall throughout the year.

But given Nio is essentially living paycheck-to-paycheck until it demonstrates a viable, profitable business model, Lee says he can’t recommend the stock.

“We believe NIO’s fundamentals have bottomed, and the current valuation looks fair to us,” he says.

Bank of America has a “neutral” rating and $3.30 price target for NIO stock.

Bank of America is projecting $1.29 billion in net losses in 2020 and $1.07 billion in net losses in 2021. It is also projecting Nio will not approach positive free cash flow for at least another two years.

How to Play NIO Stock

Looking ahead five years or more, I still want to believe a market leader in EVs in China is a great investment opportunity. The question is just how much will it cost investors to make it through the next couple of years.

Nio has tremendous long-term potential as an investment. But in an extremely high-risk market, NIO stock may be among the highest-risk plays at the moment.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.


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