Chinese electric car company Nio (NYSE:NIO) released its second-quarter earnings report. Nio stock is still losing money, but the losses weren’t as high as Wall Street analysts were expecting.
During the fiscal second quarter, Nio lost 16 cents per American share, instead of the 26 cents per share investors were bracing themselves for. The company’s revenue reached $526.4 million, which also beat estimates of $504 million.
All in all, the earnings report showed that Nio stock seems to be on the road to recovery, after running into cash flow issues earlier this year. But even though most analysts seemed pleased, the stock still fell after the earnings call.
Is Nio the “Tesla of China” as many people believe, or should you put your money elsewhere? Let’s look at three pros and three cons of investing in Nio stock.
3 Pros of Investing in Nio Stock
Increased deliveries: During the second quarter, Nio delivered 10,331 vehicles, which is a 191% increase from a year earlier. According to CEO William Bin Li, the company is increasing its production, and customer demand remains strong.
“The current constraints on production will be lifted in the near future and we are confident that our production capacity can meet the accelerated demand of our models,” Li explained. And CFO Wei Feng credited the company’s strong delivery numbers to increased efficiency and better cost control.
Improved cash flow: Early in 2020, Nio ran into significant cash flow problems. Bloomberg reported that the company ended up paying its employees six days late and asked if they would take bonuses in the form of stock units.
Fortunately, this situation has improved considerably for Nio. In June, the company received a large cash infusion from Tencent Holdings (OTCMKTS:TCEHY). As of the end of June, Nio had more than $1.6 billion in cash and equivalents.
Positive third-quarter outlook: The company doesn’t believe its second-quarter growth was a fluke. Management is expecting the growth to continue into the third quarter as well.
Nio expects to deliver between 11,000 and 11,500 vehicles during the third-quarter. And it expects total revenue to fall between $572.9 million and $596.2 million. This would be a big improvement from where the company was just a year earlier.
3 Cons of Investing in Nio Stock
The shares are overvalued: Nio stock is up more than 322% from a year earlier, which is expensive by traditional valuation metrics. That’s why Goldman Sachs analyst Fei Fang gave the company a sell rating, although he did have some good things to say about the company.
Fang tends to be more cautious when it comes to Nio stock. In July, the analyst said the company’s improved valuation reflects “over-optimism.”
The company isn’t profitable: Things seem to be turning around for Nio, but it’s impossible to overlook the fact that the company still isn’t profitable. And though profitably does seem to be in its future, it will likely take a while for the company to get there.
The momentum may not last: A year earlier, analysts were unsure whether Nio would go bankrupt or not. It’s encouraging to see the company’s growth, but it remains to be seen whether the company can sustain this momentum over the long-term.
Bottom Line
Overall, Nio is in a good financial position right now. Its sales are rising, the company reached an all-time delivery high, and its shares are up 231% year to date. However, the stock is overvalued, and Nio has yet to prove it can maintain this kind of growth over the long haul. Nio stock may be a good investment, but it’s still a risky investment.
Jamie Johnson is a personal finance freelance writer and has been writing for InvestorPlace since mid-2019. She writes for a number of other well-known financial sites, including Credit Karma, Quicken Loans and Bankrate. As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.
