NIO Stock Spikes Due to Definitive Agreement with Strategic Investors

NIO (NYSE:NIO) stock, often referred to as “China’s Tesla” and a “Tesla killer,” is trading sharply higher in pre-market trading today.

Mohit Oberoi, CFA - Author

Nov. 20 2020, Updated 4:05 p.m. ET

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  • NIO stock is trading sharply higher in pre-market trading today after the news that it entered into a definitive agreement to raise funds.
  • The company has been relying on capital issuance to bridge its cash burn.
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NIO stock

NIO (NYSE:NIO) stock, often referred to as “China’s Tesla” and a “Tesla killer,” is trading sharply higher in pre-market trading today. The company announced a definitive agreement to raise 7 billion renminbi (approximately $1 billion) from Strategic Investors. For NIO, every capital raise has been like life-saving oxygen. Earlier this year, the company raised $435 million through issuing convertible notes.

The company has been burning cash at a fast pace. The cash burn necessitates frequent capital raises. In the earnings release for the fourth quarter of 2019, the company said that the risks are a growing concern. The earnings miss and doubts about the future outlook spooked investors. NIO stock fell after its fourth-quarter earnings release.

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Tesla versus NIO stock

NIO stock has been a survival story. While Tesla (NASDAQ:TSLA) has also raised money this year, it will likely use the money to fund its capex program. We’ll get more updates when the company releases its first-quarter earnings today after the markets close. On the other hand, NIO has been raising money to survive and fund its massive cash burn. Tesla generated positive free cash flows last year.

NIO’s definitive agreement with Strategic Investors

According to NIO’s press release, “NIO will inject its core businesses and assets in China, including vehicle research and development, supply chain, sales and services and NIO Power (the “Asset Consideration”), into NIO China.” The investment values NIO at 17.77 billion renminbi (approximately $2.51 billion), which is 85% of its average market value in the 30 trading days preceding April 21.

NIO stock has fallen almost 17% this year, while Tesla stock has risen over 83% during this period.

Key terms of the agreement

Strategic Investors would take a 24.1% stake in NIO China, while NIO would hold the remaining 75.9% interest. NIO will also inject 4.26 billion renminbi (approximately $600 million) in NIO China. The company expects the transaction to close in the second quarter of 2020. After the completion, NIO and Strategic Investors would inject the cash in five tranches. Under the agreement, “NIO China will establish its headquarters in the Hefei Economic and Technological Development Area (HETA).”

NIO stock is set to open with sharp gains today. The stock rose earlier this year as well when the company announced the preliminary agreement. While the definitive agreement is a step forward, NIO stock still isn’t out of the woods yet.


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