If You’re Still in, It’s Time to Pull the Plug on Nio Stock

Stocks to sell

It’s been a wild ride for Nio (NYSE:NIO).  Late last year, Nio stock in freefall, going below $1.50, but they would then go on an impressive rally – hitting above $5.

If You're Still in, It's Time to Pull the Plug on Nio Stock

Source: Sundry Photography / Shutterstock.com

Yet lately, as the overall markets have come under pressure, NIO has been decelerating again. Note that it is now at $3.

OK then, so what now? Is it time to consider a purchase? Or should there be caution right now? Well, there are definitely clear positives with Nio stock.

Keep in mind that the company builds high-quality EVs (electric vehicles) that have sleek designs. There has even been a comparison that Nio is the Tesla (NASDAQ:TSLA) of China.

But perhaps the biggest positive for the company is its funding situation.  Let’s face it, auto companies are huge guzzlers of cash because of the high capital costs.  As for Nio, the company has been burning through about $400 million every quarter.  In fact, as of September 2019, it had only $250 million on the balance.

Yet Nio has acted swiftly, raising a hefty $1.8 billion. No doubt, this will calm the fears of liquidity.

The bulk of the capital has been pledged by the municipal government of Hefei, China. Nio has also raised capital with convertible securities.

The Strings With the Funding

When you take a deeper look at the funding, though, there are certainly some issues. First of all, it is concerning that Nio was not able to raise more money from private sources. For the most part, this is an indication of the skepticism about the fundamentals of Nio.

Next, the convertibles have tough terms. What’s more, they could ultimately lead to significant dilution of Nio stock or heavy ongoing payments.

And something else: the capital from Hefei has some strings attached. There is a requirement to build a headquarters in the region. There will also likely be hiring requirements.

In fact, Citi analyst Jeff Chung recently downgraded Nio from “buy” to “neutral” and slashed the price target from $6.80 to $4.30 partly due to these concerns.

A Look at the Fundamentals

Unfortunately, the coronavirus from China will weigh heavily on sales in the coming months, and while there are signs of a recovery, it could be slow. Nio may be particularly vulnerable since its vehicles have premium price tags. Such expenditures are highly discretionary.

In the meantime, the competitive environment in China remains intense. Consider that there are close to 500 operators on the market! True, with slower growth, there will probably be more that go bust.

But Nio will still need to contend with numerous large players like General Motors (NYSE:GM) and Tesla. They have the scale and financial resources to survive a prolonged downturn.

Bottom Line on Nio Stock

Now when looking at the long-term, Nio’s prospects do look encouraging.

“China is the biggest EV market and is likely to continue its growth path after coronavirus-related disruptions and associated macroeconomic uncertainties have been overcome this year,” said Dirk Hackbarth, who is the Professor of Finance at the Boston University Questrom School of Business.

“Last year, China accounted for more than half of over two million electric vehicles sold world-wide,” he continued. “In mid-2019 China altered EV purchase subsidies, which could be directly seen in lower new EV registrations, only temporarily relaxing an abnormally high production pressure. Access to charging networks across China continues to improve, so that EV demand will likely continue to grow rapidly in the medium term.”

However, the short-term is another matter.  For the most part, it looks like investors have not adequately factored in the inevitable sales weakness.  In light of this, it’s probably best to hold off on a purchase of Nio stock for now.

Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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