If there’s one clearly bullish sign for Nio (NYSE:NIO), it’s that the Chinese government knows when they’ve made a mistake. Previously, China declared its intent to scale back its financial incentives for purchasing electric vehicles. However, that move devastated EV sales. So, China has somewhat reversed course, announcing no significant incentive cuts for 2020. However, I wouldn’t let this be the determining factor for buying Nio stock.
Indeed, I wouldn’t buy shares at all unless you’re willing to endure potentially significant volatility. Admittedly, an increasing number of Chinese drivers have expressed interest in buying EVs, per a Statista study in 2019.
Moreover, a majority of surveyed individuals stated that tax rebates and subsidies represented main motivators for purchasing EVs. As well, most cited a similar reason for making the switch from conventional cars to the electric variety.
Given that Nio stock is extremely undervalued relative to its all-time high, I can appreciate why contrarians want to speculate. Unfortunately, the prevailing reality is that fundamentally, NIO isn’t undervalued at all. Some might argue that it’s overpriced.
In terms of fiscal stability, Nio stock is in dire straits. The company continues to bleed cash despite making substantial cuts. Further, its long-term debt has ballooned to nearly $1 billion while only carrying cash and equivalents of $251 million.
If that wasn’t enough, NIO’s Altman Z-Score currently ranks as negative 4.67, which indicates severe distress. Without an almost miraculous catalyst, Nio stock could very well collapse.
Certainly, you had to look at NIO’s Monday session as a harbinger. Showing signs of life in January, shares entered a consolidation pattern this month. However, it looks like they will end February with a whimper.
Nio Stock Needs a Miracle
For those who’ve been following the Chinese automotive market over the years, the poor financials for NIO aren’t a surprise.
First, automotive sales peaked in 2017 at 28.88 million units, divided into 24.72 million passenger vehicles and 4.16 million commercial vehicles. In 2018, total vehicle sales slipped to 28.08 million units (23.71 million passenger vehicles and 4.37 million commercial vehicles). Last year, total units amounted to only 25.76 million (21.44 million passenger, 4.32 million commercial).
Consequently, the tally in 2019 is very similar to the total in 2015 (24.6 million units overall). If sentiment doesn’t improve drastically, we should expect further deterioration in China’s automotive market in 2020. Obviously, this doesn’t bode well for Nio stock.
Second, while subsidies encouraged Chinese customers to consider EVs, the lack of charging stations deterred them from making the purchase. Similarly, concerns about battery life and range ranked as the next-highest deterrent.
I don’t find these apprehensions surprising in the least. Unlike the U.S., China never experienced an automotive culture until relatively recently. Therefore, homes were built for residents and maybe for storing a bicycle. That was fine in an anachronistic agrarian society, but it just doesn’t cut it today.
As a result of China’s distinct infrastructural history, it just doesn’t accommodate cars very well. This problem is further exacerbated in major metropolitan areas. Unless this situation changes, the adoption rate for EVs, in general, will likely be limited.
Third, despite the signing of a phase one trade deal between the U.S. and China, the latter’s economy still slowed. With millions of Chinese consumers reading between the lines, they refused to buy big-ticket items. That’s good for them but this dynamic also caused NIO’s inventory to swell, which is not a great look.
Coronavirus Looking to Put the Nail in the Coffin
While I’ve discussed several headwinds for Nio stock, I haven’t even mentioned the big one everyone’s talking about. Of course, I’m referring to the coronavirus. For the EV maker, this outbreak couldn’t have come at a worse time.
Just as Wall Street was giving NIO a second chance, this epidemic threw a monkey wrench into the rally. Even worse, the virus – I think it’s fair to say – has gotten out of control.
According to the Washington Post, South Korea now has at least 893 coronavirus cases. That makes it the second-worst hit area outside of China, suddenly overtaking the Diamond Princess cruise liner, which had 691 people test positive. As well, the Post reports a surge in infections in Italy, as well as Iran.
Perhaps most shocking is the report that a Chinese woman who tested negative eight times now has the coronavirus. This strongly implies that we really don’t know who has the virus, meaning that it could explode in a blink of an eye. In light of such jaw-dropping risk, I believe you should steer clear of Nio stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
