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Despite New Developments, Nio Stock Makes TSLA Look Stable

Thomas Niel

Nio (NYSE:NIO) stock has seen a nice rebound since the start of September. The Nio stock price has bounced from a low of $2.58 on September 3 to $3.12 at the close September 16. With new financing in place, Nio could hang on as it pursues the path to profitability.

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But is a turnaround realistic?

Tesla (NASDAQ:TSLA) will soon open its Shanghai facility. The Chinese EV market is an opportunity, but Nio does not appear to have a clear-cut edge.

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Will the company survive and thrive? The future has yet to be written. But given the valuation of Nio stock, investors should continue to practice caution.

Recent Developments With Nio Stock

Whether you are a Nio stock bull or bear, you can’t deny one thing: The company needs cash. Earlier this month, the company raised $200 million via a convertible debt offering. The buyers were Chinese conglomerate Tencent Holdings (OTCMKTS:TCEHY) and Nio’s own CEO, William Li. The convertible notes come in two tranches. The first tranche matures within a year, and is convertible at $2.98 per share. The second tranche matures in three, and is convertible at $3.12/share.

This successful financing helped to push up the Nio stock price. As I have discussed previously, financing is of big importance to Nio. The company not only loses money on an operating basis, but posts negative gross margins as well. The company is no stranger to convertible debt, raising $650 million last January using convertible notes. But while convertible debt is a cheap, it is dilutive. If NIO does manage to turn itself around, much of the upside will be soaked up by bondholders exercising their conversion rights.

The other major morsel of news was the China-U.S. trade talks. The two countries plan to resume high-level trade talks in October. The trade war affects the company, but not in a direct way since its core market is domestic. China’s economy continues to cool. The last thing it needs is a trade war that exacerbates these growth concerns. With a slowing economy, EV makers will have a tough time selling their vehicles. With the Chinese government cutting EV subsidies, demand will continue to slack for the company’s E6 and E8 vehicles.

This means NIO stock’s bounce back may be a short lived. While the Nio stock price has fallen ~70% from all-time highs, shares remain overvalued.

Competition Makes NIO’s Valuation Mind-Boggling

Nio stock is overvalued. There’s no two ways about it. With the company unprofitable, the only usable metric is the enterprise value/sales (EV/Sales) ratio. The stock currently trades at an EV/Sales ratio of 4.2. Compare this to Tesla, which trades at an EV/Sales of 2.2.


Why pay a premium when you get get Chinese electric vehicle (EV) exposure with TSLA? Yes, Nio stock is more likely to see parabolic growth due to its size. Tesla is too big to see a 500% or 1000% return if all catalysts play out. But at least Tesla has positive gross margins. Nio continues to sell cars for less than their production cost. Its hard to see how that will play out favorably.

Protectionist policies may favor NIO over foreign-owned EV brands like Tesla. But what’s to say they have any particular edge over other Chinese companies? There are scores of other automakers making electric vehicles in China. Take a look at this chart of Chinese EV sales in May. The top dogs are BAIC, BYD (OTCMKTS:BYDDF), SAIC, JAC, and Chery. With the exception of BYD, all of these are state-owned enterprises. The state-owned Chinese automakers have the scale and resources to one day build EVs profitably. I could see Nio eventually getting absorbed by one of the state-owned Chinese automakers. Nio already builds its vehicles in a JAC-owned facility.

High investor exceptions prop up the Nio stock price. But if more bad news comes out of the company, these speculators could make a run for the exits.

Nio Stock Remains a Hard Pass

There is too much risk and not enough opportunity with Nio stock. The company’s losses require additional capital infusions. Until the next earnings release (on September 24), investors remain in the dark about the company’s cash position. But despite these risks, shares remain overvalued. The Nio stock price continues to imply the automaker will be a major player. But there is little to suggest they have an edge against state-owned automakers, or foreign brands such as Tesla.

The stock remains a hard pass. While it is possible shares could rally on better-than-expected performance, shares could easily nosedive if results are worse than projected. There is nothing wrong with paying a premium for a company going places. But NIO is not exactly setting the world on fire.

Consider opportunities elsewhere, and avoid Nio stock.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities

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