The run that sent Nio (NYSE:NIO) stock rising in price multiple times has tapered off. Yet, while markets have gone sideways for its shares, investors shouldn’t sell now.
Markets are digesting the company’s conflicting truths. Nio has continued to report impressive sales, yet serious operational concerns persist.
The Chinese EV maker also recently announced an interesting new business model. This article will look at all of this news. Markets will be keenly watching Nio stock in the following quarters which will go a long way in dictating the company’s future.
Batteries Not Included
Consumers who buy a Tesla (NASDAQ:TSLA) have several battery options. But no matter which option they choose they are stuck with that battery. Nio is attempting to differentiate its vehicles with a battery rental service. So, rather than purchasing a Nio vehicle with a battery included, consumers would buy the car but rent the battery.
Nio vehicles utilizing this battery as a service (BaaS) model cost less and come with the ability to swap the battery six times monthly. The service is around $140 monthly. Nio hopes the potential decrease in charging times and initial cost reduction will entice Chinese consumers into the service.
While the idea is unique, cost benefit studies will be necessary. Nio stock didn’t move on the news. More importantly, Nio stagnated on other positive news.
If Nio is to continue to rise over the longer term, it is going to have to sell and deliver more cars. The company reported 10,331 vehicle deliveries in the second quarter. The proceeds from the sales of those vehicles represent an increase of 146.5% from the second quarter of 2019 and an increase of 177.6% from the first quarter of 2020.
Thus, on that front it succeeded. However, it is clear that markets are currently more interested in other factors relating to Nio.
Operations Are Improving
Nio uses a calculation which it calls vehicle margin. Vehicle margin is based on vehicles revenue and cost of sales only. It reported a 9.7% vehicle margin in the second quarter. This figure had been higher than -20% in previous quarters.
Nio CFO Wei Fang discussed the improvements:
“With the strong deliveries in the second quarter 2020, our vehicle margin significantly exceeded our target of over 5%, attributed to the increasing scale, higher average revenue per vehicle, reduced material costs and improved manufacturing efficiency. Additionally, we have demonstrated our capabilities to generate positive cash flow from operations, through the continuous improvement of our operational efficiency and our significantly optimized cash flow management. We will continue to enhance our efficiencies across the company in the rest of 2020 and beyond.”
While Nio managed to get this operational indicator into the positive this quarter, other severe operational problems persist.
Nio’s Continued Losses
Nio’s net loss is 64.2% lower in the second quarter than it was a year ago. This is a significant improvement. Yet, in absolute terms the number is still problematic. Nio recorded a net loss of $166.5 million.
Nio stock also reported earnings of negative 16 cents per share. Both of these metrics certainly are contributing to the cooling period Nio is experiencing. Yet, there is another factor.
The company has survived after a 2019 that was difficult, to say the least. The company raised a lot of capital by issuing convertible notes and shares to do so. Between notes and shares, the company raised more than $850 million.
I have to believe that this is a significant factor why Nio stock is currently sideways. Investors are fearful of share dilution in addition to Nio’s operational woes. Investors have to be wondering whether Nio is a case of a national champion propped up by massive tailwinds alone.
Final Verdict for NIO Stock
Nio is going to have to address all of these factors in the coming quarters. Its sales and delivery growth has been impressive, as has its turnaround from 2019.
Many analysts have a target price near $10 for Nio shares. Most analysts also rate it as a hold currently. I don’t think prices are moving up for three to six months at least.
Nio really has to address operational issues, especially cash burn. Markets aren’t interested in delivery numbers now, and Nio knows it. If it can’t do that in the coming quarters markets should understand that the capital raise that saved Nio in 2019 was all for not.
In that case, a serious sell-off will ensue.
Alex Sirois did not hold shares of any stocks mentioned in this article as of its writing.