Nio (NYSE:NIO) stock is in the red, along with Chinese automaker Li Auto (NASDAQ:LI). Last month, Li announced that it had filed a prospectus statement to sell up to $2 billion of American depository shares (ADSs). These share will be sold through an at-the-market (ATM) offering. This means that the prices of the new shares will be determined at the time they are sold based on the market price. Furthermore, the shares will be offered by banks such as Goldman Sachs (NYSE:GS) and UBS (NYSE:UBS). The proceeds from the offering will be used to fund activities like autonomous driving advancements, future car models, and platform improvements.
Now, investors are concerned that Nio may have a need for additional capital as well. Ultimately, share offerings dilute a stock’s shares outstanding, which lowers the value of each individual share.
During June, Nio delivered 12,961 vehicles, while Li delivered 13,024 vehicles. Both companies boast June year-over-year (YOY) delivery growth of over 60%.
Why Is NIO Stock Down Today?
Nio has not yet announced any new share offerings. However, the Chinese electric vehicle (EV) company has had its fair share of troubles in recent weeks. The most concerning factor seems to be a short report by Grizzly Research. Grizzly alleges that Nio has inflated its revenue and net income margins through Wuhan Weineng. Weineng serves as Nio’s battery asset management provider and was formed in 2020.
Grizzly believes that Weineng is over-inflating its battery revenue by incorrectly recognizing revenue. The short seller points out that the average duration of Nio’s battery-as-a-service (BaaS) offering is seven years. However, instead of recognizing revenue over the course of the subscription, Weineng recognizes it right away. As a result, Grizzly estimates that Nio has “inflated its revenue and net income by ~10% and 95%, respectively” for the nine months ended September 2021.
Nio responded by saying that the report is “without merit and contains numerous errors.”
However, the company later released an updated response that concerned investors. Nio’s board will form an independent committee to investigate the allegations laid out in the report. In addition, the committee will consist of only independent directors to avoid any bias. There have been no further updates on the committee’s findings.
Still, easing credit policies have spurred demand for Chinese EVs. In June, credit granted for car purchases rose by 37.5% YOY to $8.1 billion. According to state officials, commercial lender interest rates have been cut in half in a bid to support the automotive industry.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
