Although shares of Nio Inc. (NYSE:NIO) showed a “double bottom” on the charts at around $2.50, the company is not yet out of the woods. Nio issued $200 million worth of convertible notes to bolster its cash on hand. It also cut its workforce to align costs with demand. Investors are well aware now that Nio stock is not the “Tesla (NASDAQ:TSLA) of China.” It still has more to prove to win over investor confidence.
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On Sept. 5, Nio announced a private placement with an affiliate of Tencent, worth $200 million. The first tranche is due in 360 days and will cost the company 2%. Its conversion price is $2.98 per ADS. The second tranche is due in three years and has a conversion price of $2.98 per ADS of Nio stock. Nio’s stock price responded positively in the last week, rising 7.7%.
Getting Tencent’s support is a positive development. The company has the connections and the retail channel to help Nio build its branding, should Nio need it. Financially, getting the extra $200 million will give the EV maker the resources it needs to mass-produce its ES6 and ES8. Nio has an excellent product with good interior, technology and speed. It is as good, if not better than a Tesla vehicle. But at its current size, Nio will have trouble reaching a wider market. So, the extra cash on hand will help the company build positive momentum on sales.
Nio Cuts Staff
To align demand with costs and supply, Nio reportedly cut 1,200 staff. A company representative noted that the job reduction will have little impact on core operations. Maintaining R&D and user services staff levels is critical for Nio’s future success. It needs to stay ahead, offering the best technology available in its line of EVs. In the last few months, Nio closed retail stores and aligned its pop-up store model. By cutting retail floor costs, it may re-align its efforts on servicing its customers and keeping them content. Satisfied customers may help future sales, as their praise may spread throughout the region, lifting Nio EV sales.
Investor Caution Heightened
Nio stock is not the only under-performer. Tesla headed back to the $210 – $220 range in August and only recently started rebounding. Nio shares gained momentum in September, helped by hints that the U.S. and China trade war will not escalate. Sadly, much of the trading action in Nio stock and China-based stocks depend on the prospects of a trade war resolution. But chances are good that neither firm will agree on anything, so investors will need to navigate around rumors.
Nio is still a very young company whose valuations are unclear at this time. Investors who buy this stock need to hold this stock for a few years. Those who question the company’s solvency should not invest in it at all. But others who are looking for a strong EV player in China may want to accumulate a small position at current levels.
Investors need to discount Nio’s rise to the $10 range when 60 Minutes featured the company back in February. With the hype fully discounted, chances are good that the stock trades at fair value.
Price Target and Your Takeaway
Investors may choose to forecast their revenue expectations for Nio over the next decade. In a 10-year, DCF Revenue Exit model, annual revenue growth in the low double-digits suggests a fair value that is three-fold above the $3.21 closing price (around $12, per finbox.io).
Nio is a highly speculative bet but whose strong potential as a leading EV seller in China cannot be ignored. Ideally, the U.S. and China forge a trade deal that brightens the economic mood in China. If trade tensions ease for the next few months, expect Nio to report sales that exceed expectations.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
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