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Looking Ahead: Is the Worst Really Over for NIO Stock?

Anuradha Garg - Author

May 5 2020, Published 9:55 a.m. ET

NIO’s (NYSE:NIO) stock price has fallen by 21% year-to-date as of May 1. A lot of the volatility in the stock is due to the COVID-19 pandemic.

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NIO stock fell amid China’s EV slump

In 2019, the stock fell 37%. The Chinese EV industry slumped after authorities reduced the subsidies in mid-2019. Many EV makers, including NIO, were impacted negatively.

Survival issues amid a high cash burn rate

NIO missed analysts’ deliveries and earnings estimates in the second quarter of 2019. The decline started after the company’s earnings. NIO was burning cash at a very high rate. Overall, the cash wasn’t getting replenished through the company’s operations. There were questions about the company’s survival. However, NIO has raised money through convertible notes.

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Worst of COVID-19 impact is over for NIO stock

According to CNBC, NIO CEO William Li mentioned on April 29 that the worst of the coronavirus impact is over for the company. He said, “Nio hasn’t lowered its annual forecast as a result of the virus.” Li thinks that after an impact in the first quarter, the second quarter shouldn’t as bad. He said that the only material impact the coronavirus had was on the company’s supply chain. The release schedule and research and development weren’t impacted much.

Agreement to raise 7 billion yuan

Notably, NIO beat the delivery expectations for the first quarter of 2020. On April 29, NIO announced a definitive agreement to raise 7 billion yuan (about $1 billion) from Strategic Investors. The announcement led the stock to close 8% higher. However, the company isn’t out of the woods yet. While the cash raised could cover NIO’s financial needs for a relatively long period, it has to start generating cash to become sustainable and remove investors’ concerns regarding its survival.

Tesla’s success in China

The company still faces many challenges. The losses continue to mount, while the competition on the home turf intensifies. In contrast to NIO, Tesla (NASDAQ:TSLA), which started commercial operations at its Shanghai Gigafactory in 2019, seems to be doing well. Tesla’s stock price has risen 67% compared to NIO stock falling 21%. Notably, Tesla decided to reduce its Model 3 prices in China to take advantage of EV subsidies. During March, Tesla’s sales in China hit a record high despite COVID-19. Tesla Model 3 accounted for 25% of China’s EV sales.

Coming back to NIO, despite a temporary resolution to its cash needs, there are still other issues. The company needs to become profitable soon. Although Li mentioned that the worst of COVID-19 is over the company, the worst for the company and NIO stock is far from over.


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