It’s been a terrible year for Chinese automaker Nio (NYSE:NIO). The firm has been burning through cash at an alarming rate, which has significantly impeded its future growth strategy. Back in March Nio stock briefly made its way above $10 per share, but since then NIO shares have been on a steady downtrend as confidence wanes.
Many were hoping that a substantial increase in August deliveries would boost Nio’s stock price— but unfortunately the firm is up against too many headwinds for its positive deliveries figure to make much of a difference.
Deliveries Improve for Nio Stock
Earlier this year, I pointed to NIO’s August deliveries figure as a good gauge for whether or not the firm was making strides toward future growth. At the time, the Nio’s deliveries were sliding from bad to worse, and management said August would be the turning point. The company had been forced to recall a number of its vehicles due to bad batteries, but that headwind was set to come to an end in August.
In the end, NIO was able to post better-than-expected delivery figures. The reported a 35.1% increase in deliveries did give Nio stock a temporary lift. However, since then the car maker hasn’t revealed its Q3 performance and the bad news has started to pile up.
Macro Headwinds
One of the biggest concerns for NIO relates to the electric vehicle sector in general. So far, it’s been difficult for EV makers to find a way to create affordable cars that also generate a profit. The high-end price tag on NIO’s vehicles means the firm is extremely susceptible to an economic downturn — an outcome that’s starting to look more and more likely.
While trade talks appear to be headed in an amicable direction, many argue that the damage to China’s economy has already been done. If that’s the case, we might see Chinese consumers tightening their purse strings and putting a hold on big purchases, like luxury electric cars. This issue has also been exacerbated by the fact that Beijing cut back on its EV subsidiaries this summer.
Finances are Tight
Surviving a downturn isn’t the end of the world for a large, well-established company — but for Nio stock it could spell disaster. Even in a best-case scenario, NIO is strapped for cash. The firm is still years away from being able to turn a profit. While deliveries increased, it’s important to note that the majority of those vehicles were the car maker’s ES6 model, which it is actually selling at a loss.
Red Flags
With all of that in mind, investors need to be able to trust in NIO’s management and their future plans to stay the course. But it’s difficult to get on board with senior executives heading for the door themselves. On Monday, NIO’s CFO Louis Hsieh left the company citing “personal reasons.”
Hsieh’s cryptic reason for leaving has been interpreted by some as a sign that NIO can’t come up with a solid profit strategy to get its finances back on track. It isn’t much of a jump to get to that assumption either — we have yet to see NIO’s Q3 results, which suggests they’re not going to be pretty.
Competition is Fierce
On top of all that, there’s the fact that the EV market in China, although packed with potential, is full to the brim with competition. NIO is one of 486 electric-vehicle makers in China, so you can expect the next few years to witness a lot of bankruptcies and takeovers.
Nio looks likely to become the victim of one of those two scenarios based on its financial situation right now.
On top of the many other Chinese EV players, there’s also Tesla (NASDAQ:TSLA), which is rapidly expanding its Asia operations. Elon Musk claims to have cracked the code on creating electric cars and turning a profit, so it makes for a safer bet for investors looking to gain exposure to China’s EV market.
Bottom Line on Nio Stock
Nio stock is down but not out, to be sure, but it’s far too risky to be anything more than a speculative punt. At this point buying NIO stock is akin to playing a slot machine. There’s a chance you’ve got a winner and years from now the firm will have established itself as a leader in China’s EV market. However, the way it looks now, NIO stock is a poor choice for long-term investors.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
