- NIO’s stock price has fallen almost 30% this year. The price action isn’t bad considering the broader market sell-off. The coronavirus pandemic has hit the automotive industry.
- NIO’s electric vehicle shipments fell sharply in January and February due to the coronavirus. However, China is slowly limping back to normalcy.
NIO (NYSE:NIO) stock has seen selling pressure this year amid the sell-off in broader markets. However, the 30% year-to-date fall in the company’s stock price isn’t bad considering the unfavorable business conditions. The automotive sector faces demand and supply issues amid the coronavirus pandemic. NIO’s precarious financial health isn’t helping matters either. Earlier this year, there were reports that the company delayed employee salaries. NIO issued $435 million worth of convertible notes in the current quarter. Tesla (NASDAQ:TSLA) also raised $2.3 billion by selling shares.
China’s electric vehicle market
China lowered the subsidies for electric vehicles last year, which hit the industry hard. Before the subsidy cut, electric vehicle sales were a bright spot for China’s automotive industry. However, the subsidy cut changed the scene. Since then, electric vehicle sales have slumped. The coronavirus has also dented electric vehicle sales this year. The sharp fall in crude oil prices has dampened the outlook for electric vehicle producers. Meanwhile, during the fourth-quarter earnings call, NIO maintained its 2020 sales target. However, the stock fell sharply after the fourth-quarter earnings release. The earnings and outlook weren’t impressive.
Tesla’s China Gigafactory
China, where the coronavirus pandemic started, has limped back to normalcy. Incidentally, China is the only major country globally where the automotive sector has continued production. Most major economies have shut down vehicle manufacturing plants due to coronavirus fears. NIO would benefit from China’s automotive production resuming near-normal operations. The country might come up with a stimulus plan to boost the economy. Tesla’s China Gigafactory is also producing cars. The company shut down the Freemont plant reluctantly.
Positive gross margins
NIO has been generating negative gross margins. However, the company sounded optimistic that it would post positive gross margins in the second quarter. The company expects its gross margins to rise to double digits in the fourth quarter of 2020. The company expects lower battery costs, manufacturing cost savings, and supply chain optimization to help its gross margins this year. Notably, NIO slashed its workforce last year in a bid to control costs. Last year, Tesla also resorted to layoffs and stringent cost-saving measures. Tesla eventually posted a net profit in the third and fourth quarter of 2019.
NIO stock isn’t out of the woods yet
Bears expect NIO to go bankrupt amid the cash burn. Since the company has been burning a hefty amount of cash, it needs to raise capital frequently to fund the deficit. A frequent capital raise is bound to generate concerns about the company’s long-term sustainability. That said, just like Tesla, owners admire NIO cars. During the fourth-quarter earnings call, NIO pointed to higher referrals from existing owners. However, the stock still isn’t out of the woods yet. While resuming business activity in China is a welcome move, NIO has to convince markets about its long-term sustainability. Some analysts have also been bearish on the company. Read NIO Stock: What’s Making Analysts Bearish? to learn more.