At the end of April, I wrote about the $1 billion in funding electric vehicle manufacturer Nio (NYSE:NIO) had secured from the municipal government of Hefei, capital city of the Anhui province in China. Since the April 29 announcement, Nio stock has more than doubled in less than two months.
It’s amazing what $1 billion in funding will do for a company’s confidence.
On June 15, Nio sold 72 million American Depositary Shares at $5.95. Assuming the underwriters exercise their grant to buy 10.8 million more, the company will have raised gross proceeds of just under $493 million. It intends to use those proceeds as part of its $600 cash injection into Nio China, a new subsidiary set up to accommodate Hefei’s investment in the electric vehicle maker.
At times, I have been skeptical of Nio’s ability to survive. That includes the Hail Mary pass in April to secure critical funding from the city of Hefei. At the time, I wondered what would happen with the company’s $1 billion in debt it had on its balance sheet at the end of 2019.
Would that get assumed by Nio China? If not, what would that do to the value of Nio, the public company? There are still many questions to be answered.
The Lifeline Did Wonders for Nio Stock
While it’s true that Nio remains a work in progress, as The Verge reported in early June, Nio was drowning. The lifeline it received from Hefei must be viewed in a positive light. Even a skeptic like myself can see that.
“At a certain point there comes a day of reckoning where [Chinese companies] are just hungry for cash, and they look around and say, ‘what are our alternatives here?’ And the final backstop is the government,” said Michael Dunne, the head of automotive consultant ZoZo Go, an expert on the Chinese market. “China wants to lead the world in electric vehicles, and they have the wherewithal to provide Nio with the cash lifeline to allow it to proceed with its dream.”
In March, I argued that Nio wasn’t a buy under $3. Now, trading close to $8, it sure appears the billion in funding combined with a record May delivery report, have put the company back on track to becoming one of the world’s top makers of electric vehicles.
Where to From Here?
In May, it delivered 3,436 vehicles — 2,685 ES6s and 751 ES8s — 215.5% higher than in the same quarter a year earlier. It has now delivered a total of 42,342 vehicles in its short history.
In the first quarter, despite the novel coronavirus being a significant factor, Nio still managed to deliver 3,643 ES6s and 195 ES8s. While total deliveries were down 3.8% in the quarter over last year, it’s amazing it was able to deliver any vehicles given the business conditions for most of the first three months of the calendar year were close to non-existent.
On the bottom line, Nio reported an adjusted operating loss of $234.4 million in the first quarter, 41.0% less on a sequential basis from Q4 2019, and 33.7% from Q1 2019. This means that it’s heading in the right direction. The pathway to profitability is on the horizon.
If Nio can continue to execute — InvestorPlace contributor Luke Lango sees the company gaining electric vehicle market share in China in 2020 from both rebounding sales in the ES8 and the launch of the EC6 — while moving closer to profitability, I see no reason why Nio stock won’t see double digits by the end of the year.
I know it’s hard to believe that I could go from suggesting its stock would head to $0 in March to arguing it could hit $10 or more by the end of 2020, but situations change. As an investor, you must recognize when a situation has changed for the better, or worse, and adjust your investment strategy accordingly.
I’ve always liked the design of Nio vehicles but was skeptical about jumping on board because of its financial situation. However, the events of late April and May suggest that good times are here, and it’s only a matter of time before it generates a non-GAAP profit.
When will that be?
I couldn’t tell you. In 2019, Nio had an operating loss of $1.5 billion on $1.1 billion in revenues, which means it lost $1.36 for every dollar in sales. The company believes it can become profitable in 12-24 months. However, it won’t happen until its sales move beyond China to Europe and elsewhere.
I’ve been won over by the arguments of Nio bulls. I just hope it doesn’t disappoint me as Luckin Coffee (NASDAQ:LK) did.
Nio, in my opinion, is a buy, but only if you can afford to hold its stock for the long haul.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
