It is rather unfortunate and scary that the coronavirus outbreak continues to grab headlines and dictate the stock market trend. As the virus spreads beyond China, the fears of a global pandemic and its impact on GDP growth is spooking the markets. Nio (NYSE:NIO) has however been strong with a flurry of positive news. Nio stock touched a low of $1.19 in October 2019 and is currently higher by 245% at $4.11.
Amid the positive news on financing, I believe that Nio stock will correct and provide an attractive entry opportunity. At least for the near term, the positive financing news for the cash-strapped company is discounted in the price.
As vehicle deliveries remain weak in the coming months, Nio stock can trend lower. Also, the initial excitement on funding being secured will be offset by concerns on significant equity dilution.
Also, securing funding does not imply that the company can arrest the cash burn and boost vehicle deliveries amid intense competition. Tesla (NASDAQ:TSLA), Ford (NYSE:F), General Motors (NYSE:GM) and Volkswagen (OTCMKTS:VWAGY) are just some of the big names in China’s electric vehicle market.
In total, 400 companies are competing in the EV market. It remains to be seen if Nio can compete in terms of new model launches that offer attractive features in addition to reasonable pricing. Margin pressure is likely to sustain due to the competition factor.
Funding Provides Hope in Battle for Survival
One of the major concerns for Nio was to secure funding so that the company can continue to operate as a going concern.
In the first two weeks of February 2020, Nio announced a total of $200 million in private placement of short-term convertible notes. This does come as a relief for investors. At the same time, conversion of these notes will dilute equity.
Bigger news from a funding perspective was the announcement of an agreement with Hefei Municipal Government. Under the agreement, “Hefei government expects to provide resources and funding support for the long-term growth of NIO in Hefei.”
Nio stock surged by 30% on the day the agreement was announced. However, there is still much to know on the terms of the agreement. In any case, significant dilution is on the cards and that will impact shares.
Positives That Can Trigger Renewed Stock Upside
The concerns discussed above will result in Nio stock potentially trending lower in the foreseeable future. At the same time, NIO is battling for survival and growth. The following are some key positives.
First, Nio commenced the production of the new EC6 electric SUV after the financing news. The new model is likely to compete with Tesla Model 3. Delivery of EC6 will begin in September 2020 and can boost deliveries growth in 2021.
Second, in November 2019, Nio and Mobileye entered into a partnership to bring level four autonomous vehicles. This partnership is targeting China as well as international markets for growth. It is important to note that Mobileye is an Intel (NASDAQ:INTC) company. With the launch of autonomous cars targeted for 2022, Nio has an additional growth trigger. Importantly, it serves as an avenue for global expansion with robust technology support from Mobileye.
My Final Views on Nio Stock
The Chinese economy and the global economy are in a period of high degree of uncertainty. If the coronavirus continues to spread in more countries, the negative impact on growth will deepen. Specific to Nio, it is certain that vehicle deliveries will be weak in the coming months. This can take Nio stock lower in addition to dilution fears.
However, with the framework agreement with Hefei Municipal Government, Nio has ensured that the company survives. It’s worth noting that China is targeting 25% EVs on roads by 2025 from 4% in 2018. Therefore, there is ample scope for growth for EV companies.
Overall, Nio is well positioned from a financing perspective. Once the current headwind is navigated, the focus will shift on margin improvement and sustained deliveries growth. With EC6 to be launched in September 2020, Nio stock is likely to have a renewed upside trigger.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
