Despite a favorable third-quarter earnings report, Nio (NASDAQ:NIO) stock is under pressure. The stock is down over 77% from the beginning of the year. As of this writing, the Nio stock price was up about 10% from a low of $1.32 on Oct. 1.
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There are thoughts that the electric car maker will not survive without a massive infusion of cash. Even that may not be enough to save the company, which received $10 billion yuan ($1.45 billion) in May. At that time the Chinese company became part of a joint venture with state-owned fund, Beijing E-Town International Investment and Development company (E-Town Capital).
At the time, the move was seen as a positive for NIO since it came in advance of China cutting the electric car subsidy that had been spurring EV sales. These subsidies, in some cases, totaled $7,500 per vehicle. This was critical in cutting the price of entry for consumers looking to enter the EV market.
“With the subsidy adjustments, some less technologically advanced EV startups will disappear,’’ said Zhou Lei, a Tokyo-based partner for Deloitte Tohmatsu Consulting. “There will be a reshuffle.’’
Unfortunately, it appears that Nio may be getting washed away along with some of its smaller competitors. That’s largely due to two significant problems. First, the company is having problems getting the necessary funds needed to keep them afloat. And second, by selling more cars, they put pressure on their operating costs.
NIO Is Having Problems Getting Financing
One of the biggest problems facing Nio is that the company is burning through cash. Despite the infusion of cash from China, the company is still hemorrhaging it. In the company’s third-quarter earnings announcement, Nio reported they had burned through $620 million in the second quarter, leaving the company with just $503.4 million in cash as of June 30.
An affiliate of Tencent (OTCMKTS:TCEHY) was scheduled to help Nio with a $200 million sale of convertible notes. That deal has not yet gone through, and some analysts are saying it won’t do much good if it does.
Nio also had a financing deal fall through with the Wuxing District government. In that deal, the Wuxing government would invest a minimum of $707 million in the car manufacturer. The funds, which NIO said they would use a portion of to build a factory in the Wuxing District, could have been as high as $1.4 million.
However, the Wuxing government walked away from the deal citing “heavy risks.”
When More Is Less
In the third quarter, Nio stock got a lift from a 35% increase in second quarter deliveries. InvestorPlace contributor Chris Lau wrote that of the 4,799 models sold, 4,196 were their new SUV ES6. This model is the key to any future growth for Nio stock.
However, as was the case when Nio broke even on the manufacturing side in the fourth quarter of 2018, more EV sales bring higher operating costs. And despite management’s pledge to run a more efficient ship, they have been unable to make that happen.
They May Not Have Enough Customers
As part of China’s “cap and trade” policy, Chinese leaders want annual sales of new-energy vehicles to reach 7 million units by 2025. That would represent approximately 20% of China’s total automobile market. Currently, the China Association of Automobile Manufacturers says EV sales make up approximately 4% of China’s overall 23.7 million passenger vehicle unit sales.
But that’s not a large enough number to sustain all the companies looking to enter the EV market in China. That’s because a factory will need to produce a quantity of vehicles in the tens of thousands a year to be profitable.
And, although the Chinese market is big, it’s not large enough. Not even for the “Tesla of China.” Particularly when Tesla (NASDAQ:TSLA) itself is making inroads in the country. And the trade war is also having an effect in suppressing demand as the growth in China’s economy slows.
The growth of the EV market will be one of the most interesting, and potentially profitable, trends for investors in the next two decades. However, in the short term, it’s a story that requires companies to have skin in the game. Unfortunately, NIO doesn’t have a winning hand. And investors are calling their bluff.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
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