Nio (NYSE:NIO) is making progress, there is no question about it. The question is: Should you buy NIO stock given that it has already been a 20-bagger over the last year?
According to its latest earnings report, NIO could be on its way to being a major player in the electric vehicle space. NIO’s Founder, Chairman of the Board and Chief Executive Officer, William Li, reported that in the third quarter of 2020, the company delivered 12,206 of its model ES8, ES6 and EC6 cars. That’s an increase of 154% over its deliveries in the third quarter of last year. Also, in the second quarter of 2020, NIO delivered an increase of 18% versus the first quarter of 2020. These are significant numbers.
In October 2020, NIO delivered 5,055 vehicles, which is a monthly delivery record.
Mr. Li reported that NIO’s model ES6 “has been the fastest-selling electric SUV in China for 13 consecutive months. ES8 has reached the number one in sales this year in the premium electric SUV segment.” He reported that their third product, the EC6, started being delivered in September.
NIO vehicles are known for their quality. In fact, Li pointed out that “[i]n the 2020 China New Energy Vehicle Experience Index released by J.D. Power in September, NIO … ranked highest in any new vehicle quality among all brands.”
Company Expectations Exceeded
Mr. Li announced that the record vehicle orders in October exceeded the company’s expectations. He also expects further growth: “We’re confident that the deliveries will further grow to between 16, 500 and 17,000 units.” With increasing higher-margin products in the product mix and material cost improvements he expects the vehicle margin to reach 14.5% and overall gross margin to reach 12.9%, which is higher than their previous expectations.
Steven Feng, Chief Financial Officer, says that third quarter company total revenues were 4.5 billion RMB — an increase of 146.4% over last year. He also pointed out that quarter-over-quarter, the increase was 21.7%.
Looking forward, Feng says that in the 2020 fourth quarter, the company should deliver 16,500 to 17,000 vehicles. An increase of roughly 100.6% to 106.7% over the results reported in Q4 2019. Likewise, the anticipated increase would be 35.2% to 39.3% greater than that which was reported in the Q3 2020 results. Total company fourth quarter revenue estimates are for an increase of 119.7% to 126% over Q4 2019.
The Bottom Line on NIO Stock
The company might be approaching a break-even point, and this could be a very big deal. NIO’s operating loss has “narrowed to 946 million RMB” in Q3, which is a decrease of “18.4% … month over month, and a 60.7% decrease year over year.” Also, in Q3 NIO reached a positive cash flow from operating activities, Mr. Li reports. He is confident that the company will attain positive operating cash flow for fiscal 2020.
One of the risks in buying NIO stock is that their cash burn might imperil the company, and this risk could really drop the stock price, especially after a stock has gone up 20 times. Along with the hot-group aspect of NIO, some of which is probably related to Tesla (NASDAQ:TSLA), and the electric vehicle group in general, the company has had great product acceptance and impressive growth to attract investors. At $2 you might take a risk with a cash-burning company; but not at $40. And if NIO does run into a cash shortage, the stock might decline enough to create a real buying opportunity.
NIO produces good products and could be nearing a break-even point. But the stock has already exponentially advanced and has too much risk at these prices.
Max Isaacman is a Registered Investment Advisor in San Francisco. His investment books were published by McGraw-Hill and Financial Times Press, including the first book on ETFs, How to be an Index Investor (McGraw-Hill, 2000). He wrote for the Emmy award-winning Website Minyanville.com. His email is exch13@aol.com
He, nor his clients, own NIO shares.
