Volatility is par for the course when it comes to newly-minted public companies. But with Nio (NYSE:NIO), the volatility has been even more extreme than is usual. Nio stock just can’t seem to get moving, but there are reasons.
When the company came public in September 2018, the belief was that the company would somehow be the next Tesla (NASDAQ:TSLA). But unfortunately, Nio stock has been mostly in a grueling downward slide. Consider that since the offering the shares have lost about half of their value.
So what’s going on here? Why all the disappointment? Well, despite Nio’s innovative car models, the deliveries have been subpar. Just look at July, which saw a 38% drop on a quarter-over-quarter basis to a mere 837. That’s right. Less than 1,000!
Granted, a big factor was a major recall of close to 5,000 ES8 SUVs. Note that there were incidents of fires erupting from faulty battery packs (there were short-circuits in some because of the wearing down of wires).
Now it is encouraging that NIO was proactive and was able to solve the problem in about half the time expected. In fact, the company thinks the impact from the recall is mostly temporary.
The expectation is that August delivers will come to anywhere from 2,000 to 2,500. A big help will likely be the new ES6, which is a five-passenger electron crossover SUV. During July, the delivers came to 673.
A Closer Look at Nio
OK, then is this a bullish signal for Nio stock? Actually, I still think investors should be cautious. Keep in mind that the company still faces considerable challenges. Here’s just a few:
Competition: While the market in China is large for electric vehicles — and growing — there are also about 486 registered manufacturers in the country. Many are fairly small. But of course, there are some large ones like BYD (OTCMKTS:BYDDF) and Beijing Electric Vehicle Co. So it is tough for a company like Nio to rise above the crowd, especially when it has only about 2% market share. Something else: TSLA is gearing up to sell its Model 3 in China during the latter part of the year.
Subsidies: The Chinese government has cut back on assistance for electronic vehicles. The main reason is to encourage more competition. But then again, there has also been a reduction in demand, such as for high-priced vehicles.
Macroeconomy: While the Chinese economy continues to grow, the pace has decelerated. A big reason has been the U.S.-China trade war, but there are other issues like debt and imbalances, such as in the real estate markets.
Business Model: Nio does not manufacture its own vehicles. Instead, the company outsources this to a state-owned operator (Nio did try to build its own plant but has since abandoned the effort). While this helps to lower the capital costs, it does mean that margins are generally lower.
Bottom Line On Nio Stock
The prospects for EVs are bright in China. But again, the competition is intense and the economic uncertainty will likely remain a big problem.
In the meantime, NIO continues to post significant losses. Note that in the latest quarter they came to $366 million. And there is only about $1.12 billion in the bank and the debt is at $1.35 billion.
So within the next year, it would be no surprise that the company will do another capital raise – which could be highly dilutive given the low stock price. That is, for now, it’s probably best to hold off on NIO stock.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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