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NIO Is Rapidly Running Out of Options

NIO Inc. (NYSE:NIO) is the Chinese counterpart to Tesla (NASDAQ:TSLA). In other words, it is the country's largest producer of luxury electric vehicles and it struggles due to insufficient free cash flow. The company started out with a hypercar and has since been bringing more pedestrian electric vehicles to market, like the ES6.

The company is arguably a great short, as it is out of money and needs to raise capital by diluting current shareholders if it wants to survive.




On Dec. 30, the stock went up 53% in price, so quite a few shorts were squeezed out. This makes for a great entry point into an opportunistic short position. It is a very volatile stock, though, going up as much as 90% in one day after reporting higher third-quarter sales volume.

Picture: Company picture of the ES6.

NIO's problem

NIO's current immediate problem is its balance sheet. Since the company has gone public, it has been burning from $300 million to $700 million in cash per quarter. Last quarter, it burned less cash, though, as it has been laying off people and cutting costs.

Below is the asset side of the balance sheet, as communicated in NIO's latest unaudited quarterly financial update:

The company has approximately $160 million in cash left. That is very little given that the $100 million in financing raised in the quarter is included in that cash.

Funding update

Right before the Dec. 30 earnings call, CEO and Chairman Bin Li said funding was an issue and that the company would provide an update on Monday.

I've listened to the earnings call, but I heard no update. Just before the question-and-answer session, the company said only that it had made "significant positive progress" with funding, providing no specifics on the sources of said funds.

Business outlook

NIO included ostensibly high positive guidance within the quarterly financial update, including:

  • 66% more units delivered.
  • 53% growth in revenue.



However, if you deliver 66% more of a product and revenue is only up by 53%, that means you are delivering at a lower average selling price. By my estimates, this means the company is either discounting its vehicles or delivering a worse sales mix of vehicles. I estimate it is discounting its vehicles by about 8%. This 8% is problematic as it puts enormous pressure on the bottom line just as the company is in dire need of cash flow. Are the cost-cutting efforts sufficient to offset these dramatically lower sales prices?

It seems the market is misinterpreting the third-quarter results as overly positive. This resulted in a short squeeze with about 20% of the float short. At one point, the stock spiked 90% and that likely led to short covering. Day traders jumped in to play the swing, and we observed a rocketship. This could set up an opportunistic short opportunity, as the fundamentals of the company are still lacking.

The key in the company's quarterly financial update is the following disclosure:


"The Company's cash balance is not adequate to provide the required working capital and liquidity for continuous operation in the next 12 months. The Company's continuous operation, which has also constituted the basis of preparing the Company's third quarter unaudited financial information, depends on the Company's capability to obtain sufficient external equity or debt financing. The Company is currently working on several financing projects, the consummation of which is subject to certain uncertainties."



Due to this disclaimer confirming the deteriorating fundamentals, I am skeptical about whether the company has the cash to make it through the next quarter.

Maybe NIO can get a miracle deal, but that's still not great for current shareholders as the company would still be in financial distress after a last-minute save. It even included this official warning that it is out of financing options, which is terrible if you are negotiating for money.

The most likely scenario (if there is any rescue package) appears to be a financing substantially below current market prices, especially as the current market price appears to be driven by short-term short coverage.

Bottom line

Odds are the company won't end up bankrupt, but I don't see it getting enough financing to validate a $4 billion valuation. Current long-term shareholders are unlikely to come out great, but this looks like a terrific opportunistic short position from here on out (on the condition that a short seller can live through the crazy short-term swings the stock is plagued by).

Disclosure: short NIO.

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