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NIO Stock Rose: Don’t Start Celebrating Yet

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NIO (NIO) stock, China’s Tesla (TSLA) equivalent, rose more than 12% after its October delivery report on Monday. The company delivered 2,526 vehicles during the month. The figure implied an increase of about 25% compared to September. NIO’s delivery figure included 2,220 ES6s and 306 ES8s. The strong growth in October came despite the impact of the seven-day National Day holiday at the beginning of the month.

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NIO’s co-founder discussed the deliveries report

William Li, NIO’s co-founder and chairman, said, “Our solid sequential improvement in deliveries continued in October, mainly driven by the hard work and strong execution of our sales teams.” He also said, “We appreciate the support from our users and believe in the power of word of mouth as our vehicles and services continuously evolve and optimize. Meanwhile, we will continue rolling out NIO Spaces and expanding our sales network to support our future growth.”

NIO stock rose

NIO stock rose more than 12% on Monday after a solid delivery report. However, the stock is still trading down by more than 73% year-to-date. The stock, backed by Tencent (TCEHY), has shown a large underperformance compared to Ford (F) and General Motors’ (GM) positive returns of 18% and 14%, respectively, during the same period. Tesla’s YTD performance of -5.0% is also better than NIO’s performance. Unlike NIO, Tesla’s third-quarter earnings acted as a positive catalyst for the stock. Tesla achieved surprising profitability during the quarter apart from announcing expedited timelines for projects and vehicles.

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Fundamental concerns

While NIO’s October deliveries were impressive, there are still many fundamental concerns surrounding the stock. The company’s weaker-than-expected second-quarter results and underwhelming guidance highlighted severe fundamental issues with demand and cash concerns. The stock has lost almost 21% of its value since its second-quarter results. Apart from weak results, NIO’s management wasn’t able to provide much visibility about its profits or turnaround plan.

NIO’s cash burn

The company’s cash burn is still a prominent concern among investors. Bernstein said, “As it stands, we think Nio’s liquidity is now measured in weeks. It appears inevitable to us that investors will start to question Nio’s ability to remain a going concern.” To learn more about NIO’s cash concerns, read NIO Battles for Survival, Not Profitability.

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China’s EV industry

Apart from company-specific concerns, China’s EV industry is also going through a transition phase. In June, China eliminated subsidies on new energy vehicles with less than 250 kilometers or about 155 miles of electric range and halved subsidies for higher ranges. Rolling back subsidies changed the profit game for many domestic EV makers in China. For example, BYD (BYDFF) reported weaker sales figures on October 10. Due to the subsidy cuts, BYD expects its fiscal net profit to fall 43%.

China’s EV sales fell for the third consecutive month in September due to the policy change. Read EV Makers in Trouble as China’s Market hits the Brakes? to learn more.

Competition heats up in China’s EV space 

As the macroeconomic environment becomes more challenging, the competition is ramping up fast. Tesla has already started trial production runs at its China Gigafactory. The company will start producing the Model 3 for Chinese consumption very soon. We compared NIO and Tesla’s prospects in the Chinese EV market. To learn more, read How NIO Is Failing Where Musk’s Tesla Is Thriving.

In addition, foreign automakers Toyota (TM) and Volkswagen (VLKAF) are working to gain market share in China. Ford (F) also plans to launch at least ten new EVs in China in the next three years. The company is overhauling its product line-up.

Is NIO’s stock rally sustainable?

Even though NIO needs stable management and long-term vision towards profitability, the challenges continue to grow. As we discussed in NIO Stock: Woes Multiply, Survival Struggle Continues, the company’s CFO resigned in October. While the company cited “personal reasons,” National Business Daily of China stated that “the abrupt leave is likely related to NIO’s new financing strategy.” High profile departures at the company also question its long-term strategy and vision.

While the stock rose due to a stronger-than-expected deliveries report, the company needs more than that for a sustainable rally. NIO needs to ease investors’ concerns about cash burn, create a clear path to sustainable profitability, and work on transparency.

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