The buzz surrounding Nio Inc. NIO has steadily increased over the last year. Dubbed the "Chinese Tesla,” the company is a manufacturer of electric vehicles. The cars are sleek, like something out of a futuristic action movie. But taking a look under the the company's hood, there is still much to be desired.
I want to preface this with the fact that Nio becoming a penny stock is by definition of the price of the stock. If you were to ask someone, “What is a penny stock?” the primary definition is a stock that trades under $5 per share. Given that Nio had been briefly trading below $5 last week, it technically flirted with the penny stock price level.
Why Is Nio Getting Hit Hard By The Bears?
Let’s take a look at the Nio stock chart:
It’s clear that trouble started to simmer at the beginning of March 2019. Specifically, on March 6, shares gapped down from a price of $10.16 at the close on March 5 to an opening price of $8.26 the following morning. In addition, the stock saw analysts from Bank of America Merrill Lynch downgraded the stock from Neutral to Underperform.
The most significant factor that seems to be unsettling to Nio-longs has been the company’s latest earnings report and corporate guidance. In a company statement, Nio explained, “The sequential slowdown in vehicle deliveries in January and February was mainly caused by accelerated deliveries made at the end of last year in anticipation of EV subsidy reductions in China in 2019, the seasonal slowdowns surrounding the January 1st and Chinese New Year holidays, as well as the current slowdown of macro-economic conditions in China, particularly in the automotive sector.”
Though commenators like Jim Cramer say they “wouldn’t sell” Nio, the rest of the street is hard pressed to argue against that idea. Shares of the EV manufacturer are down by about 50 percent since the beginning of March as the stock continued to flirt with the $5 level this past week.
Two Modes Of Thought
As one watcher comically states, “On the bright side, maybe this drop opened up new attention from investors who would not have seen the company, otherwise.”
There may be some actual merit to this idea, as there is a segment of investors that only trade penny stocks. The vast majority of investors may feel a bit different about the current state of Nio, though. The numbers seem to speak for themselves.
The company’s second quarter of it being a public company ending as of Q4 2018 showed a brief high point for the company. If investors only looked at these figures, there may be some confusion as to why the stock is down so much.
Several milestones for the company’s financial results showed things like delivery to nearly 8,000 customers, which exceeded company expectations. Nio also revealed its own “affordable” model, the ES6, which is set for production in June at a sticker of around $52,000. Also, considering that the company’s deliveries came in higher than expected, Nio exceeded its previously set guidance for the quarter.
A Tough Road Ahead
This was all erased by the company’s guidance, however, which shows that there may be hard times ahead at least for H1 of 2019. CFO Louis Hsieh admitted that he's not optimistic about sales in the near term, saying, “We expect a greater than anticipated sequential decrease in deliveries in the first quarter 2019, partially due to accelerated deliveries made at the end of last year in anticipation of EV subsidy reductions in China in 2019, as well as the seasonal slowdowns surrounding the January 1st and Chinese New Year holidays. We also expect deliveries in the second quarter of 2019 to reflect continued weakness as we await the results of the 2019 EV subsidy policy in China and improvement in the macro-economic conditions.”
The company’s financing efforts may also pose risks down the line. For example, earlier this year Nio sold a $750 million convertible bond to fill the gap between the money it raised in its IPO and what it had expected to raise. As far as the future is concerned for the first quarter, the company is expecting between 3,500 and 3,800 ES8s delivered (compared to 7,980 in Q4) and revenue somewhere between $202.3 million (RMB1,390.9 million) and $220.5 million (RMB 1,515.7 million).
Additional Risk From The EV Rush
Despite Nio’s woes, the EV market is getting hot for big money raises. This could also put the company to the test as competition continues to grow. This is due in part to the recent changes in China’s standards for new energy vehicles, which will qualify for subsidies.
Just recently, Leap Motor, a smaller EV producer, was seeking a private raise of about $372 million. Deutsche Bank and Chinese brokerage Huatai United Securities are acting as the advisors on the financing. Leap is also backed by state-owned Shanghai Electric Group Corp and Sequoia Capital China. The initial target valuation for the company is in the ballpark of $1.5 and $1.6 billion before this funding round.
In addition to Leap, other companies are standing at the curbside. In January, Byton was seeking to raise at least $500 million to finance its growth. The company is only three years old but already has more than 50,000 customers and a valuation of more than $4 billion according to its CEO and Co-Founder, Daniel Kirchert. Byton plans to start mass production in the fourth quarter of 2019, which could precede a potential initial public offering. The three-year-old company valued more than $4 billion, has more than 50,000 customers, half in China and half abroad,
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