Shares of China’s electric car company Nio (NYSE:NIO) have dished out plenty of pain in just the past couple of weeks, with Nio stock still down 40% since its post-earnings plunge that took shape back on Sept. 24. Worse, even with the modest relief from the recently-hit record low of $1.19, the current Nio stock price near $1.63 is still only one-fourth of its IPO price from September of last year.
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If you’re getting the itch to take a shot on NIO here after whispers that China’s government is mulling a much-needed bailout, you’re not crazy, and you’re not alone.
Just make sure you understand what Nio stock really is here.
Nio Stock Crashes and Burns
Investors more or less knew it would be bad. They didn’t know, however, just how bad it would be. Last quarter’s loss of 45 cents per share (a $479 million loss overall) was nearly triple that of the 18 cent per-share loss analysts were modeling. And though revenue of $219.7 million was well above expectations of $184.6 million, it’s a far cry from the kind of top line the young company needs to be driving.
Quarterly sales were lower to the tune of 7.5%; Nio should still be growing revenue in light of its production ramp-up and the fact that it only began delivering cars last year.
Perhaps worse, the major loss confirmed the market’s worst fears about Nio. It’s quickly running out of cash.
The company responded quickly and decisively to that reality, announcing at the same time it released last quarter’s numbers that it would also move forward with smaller-than-planned showrooms and cull its employee base. It’s also spinning off some units it says it doesn’t need. It’s clearly a defensive maneuver, and may just as easily undermine the company’s capabilities to make enough quality cars to drive necessary revenue.
Perhaps worst of all, Nio thereafter announced it was issuing $200 million worth of debt to provide near-term liquidity. It’s already got more than $1 billion in long-term liabilities on its balance sheet, which is quickly becoming difficult to service.
The picture is grim, to put it bluntly, for a company that’s been pegged as the Tesla (NASDAQ:TSLA) of China, hence the recent meltdown. That doesn’t make Nio stock un-ownable, but it does mean you have to understand ‘the play.’
A Temporary but Powerful Catalyst
It was only a rumor of a possibility, but sometimes that’s enough. Nio may be on the receiving end of some sort of bailout effort, if not from key stakeholder Tencent Holdings (OTCMKTS:TCEHY), then China’s government that wants to be a high-profile player in the EV market. Sanford C. Bernstein analysts led by Robin Zhu first floated the idea this week.
It’s a distinct possibility, though the plausibility of that prospect isn’t entirely relevant. What matters most here is that a crowd hungry for a turnaround now has an idea to latch onto.
And they did, in spades. It’s where and how they latched onto it that’s so encouraging.
Look back at the daily chart’s action from Wednesday, Oct. 2nd, right after Bernstein’s Zhu made the suggestion that a bailout may be impending. After an open below Tuesday’s low, the Nio stock price grew to a close above Tuesday’s high. This sweeping intraday change of heart is called an “outside day” reversal, and indicates a massive reversal of sentiment. Thursday’s follow-through solidifies Wednesday’s hint.
It’s a purely psychological matter, and as such, the effect won’t likely last very long. In light of its 40%(+) beat-down in just few days though, even a few days’ worth of bullish action could be relatively significant.
Bottom Line for Nio Stock
Nio may still have a shot at eventually being a viable electric car company. It may not happen, but it could. Only time will tell. But, it’s too soon to be making such a decisions. The cold, hard fact of the matter is, nobody knows right now.
And that’s an important reality to bear in mind, particularly for anyone who does step into a new Nio trade here. Don’t mistake a few bullish days as proof that this name will end up being as rewarding as its rival Tesla’s shares eventually did. It’s just a trade, likely to run into resistance at key moving average lines all around the $2.80 area.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
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