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The Drama of Nio Stock Does Not Bode Well for Investors

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·5 min read
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Month after month, Nio (NYSE: NIO) stock investors hold on, hoping for some sign from the company that it is on the right track. Up to this point, the company has given them little reason for confidence.

The Bizarre Run in Nio Stock Is Over: Get Out Now
The Bizarre Run in Nio Stock Is Over: Get Out Now

Source: xiaorui / Shutterstock.com

The headlines about Nio have been one red flag after another. China recently extended its key electric vehicle tax credits until 2022. But before the owners of Nio’s stock could even cheer the news, the company announced that its head of electric-drivetrain engineering had left the company.

China Is Supporting Electric Vehicles

Nio shareholders got some good news from the Chinese government last week. China announced that its EV subsidies which were set to expire this year will be extended to 2022. In addition, China will extend its 0% sales tax on EVs for  two years. The buyers of Chinese internal combustion vehicles pay a 10% purchase tax.

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Clearly, China is stepping up to support Nio and the EV sector in general. In 2019, new energy vehicle (NEV) sales in China dropped 4% compared to 2018. In February, amid the COVID-19 craziness, the sales of new-energy vehicles in China were down 75% compared to a year earlier.

Bank of America analyst Ming Hsun Lee says he expects local EV subsidies to return in some areas of China this year.

“In our view, the China government’s supportive policies will be positive for business development, pricing (alleviate pressure), and working capital of EV value-chain companies such as CATL (EV battery), EVE Energy (EV battery), Yunnan Energy (EV battery separator), BYD (EV & EV battery), and NIO (EV brand),” Lee says.

Its always good for the government to have a company’s back. However, as I’ve said before about Alibaba (NYSE: BABA), it’s especially good for the Chinese government to have a company’s back.

Beijing exercises tight controls over its markets. That often makes it difficult for international companies to compete with local companies in China. Given Nio’s struggles, it could certainly use the help.

More Drama for Nio Stock

Unfortunately, while China is doing everything it can to help  the EV industry, Nio is still struggling to get its ducks in a row.

Nio recently confirmed the departure of its vice president of user development and its head of electric-drivetrain engineering. The latest round of management turnover comes after the company set extremely ambitious financial targets on its fourth-quarter earnings call. Management said it expects the company’s losses to sink by 35% in the first quarter compared to Q4. It also promised positive gross margins by Q2.

On the surface, these targets may seem to be a sign that the company is finally getting serious about profitability. However, Nio has made these types of pledges before, and it’s not the first time the company has reshuffled management to try to solve its problems.

Nio’s Q4 sales numbers weren’t particularly encouraging. Its revenue was down 17%. The company’s operating loss of $406 million was an improvement versus its $509.5 million loss a year earlier. But Nio finished 2019 with a startling cash balance of just $161.7 million.

So far in 2020, Nio has scratched together enough new capital to keep the lights on for the time being. A series of three private placements in February and March raised $435 million. Nio also announced a vague cooperation agreement with Hefei City that’s reportedly worth$1.42 billion, but the details of the deal are unclear.

How to Play NIO Stock

Lee is optimistic about the impact of Nio’s cost-cutting initiatives.

“We believe NIO’s fundamentals have bottomed, and the current valuation looks fair to us,” Lee says.

In other words, things shouldn’t get any worse for Nio investors. At the same time, Bank of America’s “neutral” rating and $3.30 price target doen’t instill much confidence that things will get much better.

There are reasons for optimism. China is the largest emerging-market economy, and there’s no question that EVs will play a huge role in its future. Unfortunately, somehow Nio just can’t seem to get it together.

If Nio survives its capital crunch, the stock could easily jump 1,000% over the next five years. But that outcome is far from a sure thing, given it has been teetering on the brink of insolvency.

I don’t necessarily think it’s crazy to buy Nio stock. The important thing for those who pull the trigger on it is to realize that it may be closer to a lottery ticket at this point than  Ford (NYSE: F) stock.

The Bottom Line

A bet on Nio stock is a bet that the company’s entire business will change. It’s a bet that Nio will find a way to be consistently profitable and will do so before its capital raises run its share price completely into the ground.

If you’re looking for a way to invest in the long-term transition of the global auto industry to EVs, look elsewhere. If you’re looking for a fun and potentially lucrative way to gamble on a volatile stock market, NIO stock has the potential for tremendous long-term gains.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, he was long BABA stock.

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