The story of Nio (NYSE:NIO) hasn’t changed, but that doesn’t seem to be scaring away investors. Nio stock is up more than 100% since hitting a low of $1.52 on Nov. 1, 2019. That’s a nice benefit for investors who bought the dip. But investors who jumped in on Nio’s initial public offering in September 2018 are sitting on a 66% loss.
Nio faces a problem that, to its credit, it doesn’t really deny. Despite being in the world’s largest electric car market, the company is not yet profitable. When I last wrote about Nio in March, I argued that Nio bulls were investing in a flawed premise. It goes like this.
If electric cars are a growing market, and China is the biggest buyer, and Nio is a Chinese company then voila, the company should be profitable.
And therein lies the problem. Nio is not yet profitable and according to analysts’ forecasts, that isn’t likely to change through at least 2021. Let’s look at the reasons why.
Nio Is Cash Poor
In March, Nio released its financial figures for 2019 in March. At that time, the company confirmed what many investors already suspected. Specifically, Nio said that it lacked the cash to continue operations for the next 12 months.
But, as Wayne Duggan wrote for InvestorPlace, Nio did get a lifeline in the form of three private placements that raised $435 million in February and March. And Duggan’s article points out that there is a yet to be clarified cooperation agreement with Hefei City that could be worth $1.42 billion.
The problem is that all of this infusion of liquidity for Nio won’t matter if the company doesn’t change the narrative on car sales. Nio stock got a lift when the Chinese government announced it would extend its current subsidies through 2020.
However, as reported by Aparna Narayanan in Investor’s Business Daily, the Chinese finance ministry recently announced that as of April 23, the subsidies will only apply to passenger cars that sell for less than approximately $42,000 (300,000 yuan). Yes that hurts Tesla (NASDAQ:TSLA). But it also hurts Nio, whose model ES8 sells for between $67,000 and $68,000.
The Field Is Getting Crowded
So you already have a company that is struggling to stave off bankruptcy yet is finding that it may be pricing itself out of its only market. And as Dana Blankenhorn wrote earlier this month, Tesla is no longer Nio’s only competitor. As part of the funding it received, Nio is going to be assimilated into a larger Chinese ecosystem. Blankenhorn wrote that it’s likely Nio will be a high-end brand that is not really distinguishable from JAC Motors.
China signaled its intention to keep Nio alive in February, signing a $1.4 billion deal through the government of Hefei. Hefei is the home of JAC Motors, the state-owned car company leading China’s electric car efforts.
The price of the bailout is that Nio will be incorporated into the mainstream of Chinese car operations. The company agreed to build new offices in the city and “deepen its relationship with local ecosystem partners,” its press release said.
What Is Your Best Case for NIO Stock?
Nio’s stock reached its record high on March 1, 2019 at $10.06 per share. The stock is currently selling for $3.24 per share. The question for investors is what is their ceiling for NIO? Since May 31, 2019 the stock is basically flat.
It seems fairly apparent that the unprofitable Nio is not too big to fail. It does seem, however, that China feels Nio is too important to fail. This is the only reason that I can give for the government continuing to prop up the company.
But even with that backstop, I find it hard to buy what Nio is selling.
The company simply doesn’t appear to have enough critical mass for selling luxury electric vehicles. And even the Chinese government seems to understand that. When you combine that with an increasingly crowded playing field, there’s simply no reason to see Nio as being a profitable, long-term investment.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
