Sell High-Risk Nio Stock After Its Results Confirm the Worst

As red flags surround recent financing deals, steer clear of "China's Tesla"

The results are in for Nio (NYSE:NIO) stock. Almost three months after the end of the fourth quarter, Nio released its Q4 results today. Yet it’s the current quarter that will make or break the Chinese electric-vehicle maker.

Nio stock
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The reason is obvious. With the coronavirus from China impacting the country’s economy starting in January, its Q1 results won’t be pretty. The company anticipates that its Q1 results will slump tremendously from Q4.

Nio’s cash flow wasn’t exactly great, as the company posted a net loss of $411.5 million. In other words, even though its revenue jumped 55% versus the prior quarter, the company is still losing a great deal of money.

On Nio’s balance sheet, its cash and cash equivalents fell to $123.9 million as of Dec. 31. Throughout the last two months, the company  has raised more funds via convertible debt sales. It’s also working to conclude a deal with a local Chinese government. If an agreement is reached, it could be the “Tesla (NASDAQ:TSLA) of China’s” “funding secured” moment.

However, it’s not yet clear whether the deal will lower the value of the company’s stock. That uncertainty, coupled with the company’s poor Q1 guidance, make it very unlikely that Nio stock can rise.

Recent Financing Deals and Nio Stock

In a prior article, I discussed two convertible debt deals that Nio made in order to raise cash. The company raised $200 million from the notes which covert into Nio stock at $3.07 per share.

Yet, since the publication of that article, the company has made a “framework agreement” with the municipal government of Hefei.  If the deal is finalized, Nio will receive $1.42 billion in financing, and it will  build its manufacturing and research base in the Chinese city.

But the Hefei deal includes many red flags. As InvestorPlace columnist Tom Taulli asked on Mar. 11, why couldn’t Nio raise significant capital in the private markets?

Also, by how much could the Hefei deal lower the value of the company’s stock? Nio is keeping the details close to the vest.  The company is waiting until the end of April  to provide further information about the deal.

Change in Outlook Indicates Further Downside

Nio’s deal with the town of Hefei could drag down the stock tremendously. Yet, until further developments materialize, we can’t speculate whether this deal is bad for shareholders. Also, the transaction may not occur.

As I wrote last year, Nio had a deal with another government entity, E-Town Capital. But that deal was never finalized. The company is good at announcing big deals, but closing on them remains elusive. The Hefei agreement could wind up being another E-Town deal. If the Hefei deal does not close, the company will have to scramble for a new  source of capital.

But this isn’t the only bad news for the company. Nio announced that its Q1 sales would drop 55%-57% versus Q4 to $173.7 million and $182.9 million.  That is not unexpected, given the recent disruption to China’s economy.

The Bottom Line: Sell Nio Stock

Another convertible note offering earlier this month provided  Nio with $235 million. The company may now have enough cash to keep the lights on. But can it prosper? It all depends on how fast China’s economy can recover from the outbreak.

In short, Nio stock could head lower, as the company remains on shaky ground. Since October, short interest in the stock has fallen from 28.8% of its  float to 22.5%, reducing the chances of a short squeeze. After the company’s recent results confirmed the worst fears about it,the shares remain a sell even as they head below $2.50.

Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

 


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/sell-nio-stock-results-confirm-worst/.

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