Following its 2018 IPO, Nio (NIO) was dubbed the Asian Tesla. The stock was considered a potential multi-bagger by multiple social media pundits. Knowing that China has an issue with pollution and observing that Chinese automobile buyers tend to prefer domestic cars, it felt like the sky was the limit for the company and its shares.
However, that was then and this is now. As I write this, NIO stock has literally lost half its value in the past week. NIO stock has notched a new record low that’s well below its IPO price. That leaves the question of whether investors should hold their shares and hope for the best—or cut their losses and consider it a lesson learned.
Making sense of the Nio wreckage
As we unpack this post-IPO disaster story, we have to wonder whether there’s any lesson to be learned. Were there signs we should have seen, indicators that all was not well with the company? Dipping into Nio’s second-quarter earnings report, released on September 24, might provide some insight into Nio’s shortcomings—and whether a U-turn is possible at this point.
In Q2 2019, Nio’s vehicle sales fell 7.9% compared to the first quarter. Rather than accept most of the blame, the company’s report deflects it. Nio asserted that the precipitous drop in vehicle sales was “mainly due to the decrease in sales volume in the second quarter of 2019 caused by the electric vehicle … subsidy reduction announced in late March and the slowdown of macro-economic conditions in China which has been exacerbated by the US-China trade war.”
If you’re starting to see a red flag here, you’re not the only one. Granted, the subsidy reduction and the trade war were legitimate issues. However, they shouldn’t be enough to fully account for a nearly 8% vehicle sales drop within three months’ time. When I’m evaluating a company’s leadership, I view accountability as a key component. I’m just not seeing it here.
Total revenues for the second quarter were also rather dismal, having declined 7.5% compared to the previous quarter. What bothers me the most, though, is how much money Nio spent in such a short period of time. The company’s R&D expenses in Q2 increased 20.6% compared to Q1, and they increased 70% compared to Q2 2018.
Only weeks to live?
Meanwhile, Nio’s SG&A expenses for Q2 2019 showed an increase of 48.6% over Q2 2018. When weighing its revenue losses against its magnitude of spending, I understand why critics call Nio the “king of cash burn.”
As “cash burn” devolves into “liquidity crisis,” some experts are citing existential concerns for Nio—meaning sooner rather than later. Bernstein analysts have been particularly stark in their commentary, suggesting that Nio could run out of gas in short order. Bernstein noted, “As it stands, we think Nio’s liquidity is now measured in weeks. It appears inevitable to us that investors will start question Nio’s ability to remain a going concern.”
Because its shares have been halved recently, we could argue that markets are efficient and all of this has been priced in. There might be something to that argument, but a note from Morgan Stanley has a cogent rebuttal: “Market expectations are much reduced, but limited fund raising options may be an overhang.”
Nio needs a hero
In other words, Nio needs cash—and it needs it fast. We can only speculate whether any automakers would dare to buy out the ailing Nio. We believe it’s at least superficially plausible that a buyout (or a buyout rumor) could boost NIO’s stock price.
In our view, it’s possible that a corporate Superman could swoop in and save Nio, rescuing shareholders from total capital loss. However, that’s pure speculation—not my cup of tea. However, you’re more than welcome to place your bets and hope that Nio’s savior arrives before this once-promising startup goes belly-up.