Nio (NYSE:NIO) stock has skyrocketed well over 50% in the past month. This Chinese company has been riding a huge wave of enthusiasm and speculation in the market over electric vehicle stocks.
Naturally, the company wanted to take advantage of this and raise equity capital right at the point of peak interest. On Thursday, Aug. 27, Nio announced it was going to raise money by issuing 75 million American Depositary Shares. In addition, the underwriters have the option to buy 11.25 million ADSs as well. That is 86.25 million ADSs in total.
At $17.50 per share — a level it passed just before the announcement — that would bring a much needed $1.3 billion to the company’s coffers. Moreover, if the underwriters exercise their option in full, the total would be $1.5 billion before underwriting expenses. That represents about 6.6% of its present $22.8 billion market capitalization.
Chinese EV Makers Seek U.S. Cash Injections
This is the second time in several months it got a cash injection from U.S. investors. In June, Nio sold 72 million shares at $5.95 for over $484 million.
And it is not the only Chinese company in the EV space to seek out U.S. investors. Just last week, Xpeng (NYSE:XPEV), another Chinese EV maker, raised $1.5 billion in its IPO.
And consider this. Xpeng is only about a third of the size of Nio. It delivered just about a third the number of EVs as Nio did this past quarter, yet it still raised $1.5 billion.
The point is, despite all the politics between the U.S. and China, Chinese companies in the EV industry still seem to need U.S. investors.
Nio Needs the Money and Confidence
Let’s go back to Nio and its plan to raise $1.5 billion. That is money the company sorely needs. As I explained in my article last month, up until recently, Nio lost money, even on a gross margin basis on every car sold.
But analysts and investors were impressed on Aug. 11, when Nio reported its second-quarter earnings results. The company delivered 10,331 cars. This was up 25.6% over the prior peak in Q4 of 8,224 EVs.
Moreover, for the first time, both its vehicle margin and its gross margin turned positive. The vehicle margin covers profits from sales of just its vehicles. That number was 9.7% vs. the prior quarter of negative 7.1%.
But Nio still lost money overall. Q2 losses were $164 million on a non-GAAP basis after the exchange rate conversion. Since Nio has only about $1.6 billion in the bank, it can’t keep on losing money.
However, this loss was much better than Q1 when it lost $235 million on a non-GAAP basis. Nio does not produce a quarterly cash flow statement. So we do not know exactly how much cash it actually bled out during the quarter. I suspect it is at least 10% more, or $176 million in cash burn during Q2.
Therefore, this capital raise cash will provide almost double the amount of cash it already has on its books. And it will allow Nio to expand its operations, and if need be, allows a safety margin should its overall losses continue.
Analysts Are Turning Positive on Nio Stock
The fact is Chinese are turning to EVs like no other country in the world. Recently a UBS analyst, Paul Gong, who was super negative on Nio stock, came out with an upgrade to “hold” from “sell.” This caused a huge jump in the stock.
He pointed out two factors — that the demand for EVs in China is rebounding and the company has been able to stay alive with capital raises. Now his target is $16 per share.
I suspect he won’t be the only one in the near future that changes their mind about Nio, especially with this capital raise. After all, at the beginning of 2020, the company’s stock was around $1 and it was probably almost bankrupt.
Keep in mind this is a speculative stock. But investors seem to be thinking it could be another Tesla (NASDAQ:TSLA) story in the making. Why else would Nio stock have a $22 billion valuation with just 10,000 or so deliveries and no profits? In other words, hang on to your hat, if you believe it will repeat the Tesla valuation story.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.