“I’m not a fan of the stock with the EV market pulling back,” I wrote. “You can find better opportunities elsewhere at the moment. This slow-motion train wreck will continue for the foreseeable future.”
Admittedly, I was wrong.
Since my bearish case, NIO shocked the market and exploded from a low of $1.77 to a high of $4.87. All thanks to deliveries that grew 35% year over year, strong earnings, and a forecast no one saw coming. In fact, its net loss for the quarter narrowed to RMB2.52 billion ($352.8 million), or RMB2.48 a share, from RMB2.81 billion, or RMB42.59 a share, year over year.
Going forward, the company expects to deliver 8,000 vehicles in the fourth quarter. It also expects to post revenue of RMS2.81 billion — above estimates calling for RMB2.07 billion.
However, before you jump on the NIO bandwagon, don’t. Even with great earnings, a powerful forecast, and a cooling trade war, NIO is a slow-motion train wreck to avoid.
Financial Struggles and Nio Stock
While recent earnings and forecasts are certainty inspiring, it is clear the company is struggling.
For one, it may sound exciting to hear that vehicle deliveries are up and increasing, unfortunately, vehicle margins are still sinking. In fact, in its most recent quarter, it was negative 6.8%, as compared to negative 24.1% in the previous quarter.
Worse, Nio doesn’t appear to be concerned about continuing losses, as noted in a recent statement: “The Company operates with continuous loss and negative equity. The Company’s cash balance is not adequate to provide the required working capital and liquidity for continuous operation in the next 12 months.”
NIO is also burning through cash. In the third quarter, it lost another $352.8 million, dropping its cash balance to $274.3 million. Nio’s continuous operation depends on finding ways to finance debt. Nio clearly is spending too much energy just trying to stay afloat, let alone find a route to profitability.
“The company still has a very real chance of running out of cash. Expectations aside, the Q3 numbers are enormously concerning. The gains of Nio stock price this week look like a near-term short squeeze, rather than a reaction to a change in the long-term outlook of NIO and its shares,” says InvestorPlace contributor Vince Martin.
China, EVs and Nio Stock
China wants EVs to make up a fifth of its auto sales by 2025.
To make that happen, China introduced subsidies and tax incentives for the production and purchase of electric cars, as I noted in November 2019. China then started cutting those very incentives because there were far too many automakers.
As a result, between July and October 2019, electric vehicles fell 28% year over year.
“The big drop suggests demand for the new technology isn’t strong unless the government is picking up a big part of the tab. Without subsidies, EVs are still priced above conventional cars with similar specifications,” says The Wall Street Journal’s Jacky Wong.
Despite this, automakers are still pumping out more EVs in China, even if it’s not a profitable move. That then creates a giant glut, and companies like NIO could suffer.
While I was admittedly wrong about NIO immediate-term, the cash crunch, coupled with poor margins could weigh on NIO stock. I’m not so sure NIO will still be around a year from now.
You can find better opportunities elsewhere. Avoid NIO’s latest rally.
As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.