Nio (NYSE:NIO) stock is in the red after U.S. District Judge Nicholas Garaufis stated that shareholders can move forward as a class in a lawsuit against the Chinese electric vehicle (EV) company. Shareholders who purchased NIO stock during its Sept. 2018 initial public offering (IPO) and between Oct. 8, 2018 and March 5, 2019 are eligible to participate in the class action.
The lawsuit claims that shareholders were harmed by a decline in share price after Nio disclosed in March 2019 that it would cancel plans to build a new factory. Shares fell by 30% to about $7 from roughly $10 following the announcement. During its IPO, Nio claimed that the factory was “under construction.” Shareholders believed that Nio’s construction of its own factory would “alleviate its reliance on a Chinese state-owned manufacturer.”
NIO Stock: Judge Allows Class Action to Move Forward
According to the lawsuit, construction of the factory was never started. This conclusion was made based on communications with former employees and a lack of construction permits. The lawsuit also places blame on underwriters such as Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) for failing to appropriately review Nio’s factory plans. Nio itself has denied the allegations, while its attorneys did not immediately comment on the situation.
According to Reuters, obtaining Garaufis’ class action approval was a major step in the litigation process. In addition, securities class action lawsuits rarely make it to trial. The lawsuits that are not dismissed often result in settlements, although Nio “may also ask the judge to rule in its favor without a trial.”
In better news, NIO stock recently received a new price target of $19.20, up from $13.90, from Citi analyst Jeff Chung. Chung believes that Nio’s momentum will last until at least September based on a strong order pipeline, the release of the EC6 and strong seasonality toward the end of the year. The analyst added that a potential positive catalyst could occur if German automakers show cooperation interest with Nio’s battery swap and charging facility stations.
In July, Nio delivered 20,462 vehicles, up 103.6% year-over-year (YOY). The ES6 was the company’s most popular vehicle with over 10,000 deliveries.
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.
