The decline for Nio Inc (NYSE:NIO) stock has been relentless since March 2019. Nio stock price has slumped due to several fundamental concerns and these worries sustain. While a bounce back from oversold levels is entirely likely, NIO is far from being considered a portfolio stock.
This coverage on Nio stock will discuss the factors that will continue to negatively impact the stock price. In particular, the focus will be on the macro-economic environment, intense competition and cash burn.
Negative Impact of Weak Economic Growth
China’s economic growth is at its lowest level in almost 3 decades and I believe that the impact will be felt by NIO. The potentially negative impact will be exaggerated by the following factors:
- NIO can be classified in the “luxury market” segment, which is likely to witness deeper impact of the slowdown.
- With China ending subsidies for electric vehicle manufacturers, the selling price is likely to trend higher. This can be counterproductive for sales volumes in a weak economic scenario.
- NIO is faced with intense competition and manufacturers with higher financial flexibility are likely to be well positioned in a slowdown scenario.
Nio Sales Volume Remains a Concern
In July, NIO only managed to deliver 837 vehicles, which was 38% lower than June. The company also pursued voluntary battery recall for 4,803 ES8s and that was a key factor for sales slump.
At the same time, the company will be reducing its workforce by 1,200 by September. This is a clear indication that the company sales volumes might remain relatively depressed. It is also an indication that cash burn concerns are significant as fund raising can be difficult in a weak economic scenario. Nio Inc is therefore looking to cut cost.
However, in the medium to long term, the focus has to be on accelerating sales volumes. If that does not happen, positive operating and free cash flow is a distant dream.
Can Sales Volumes Grow With Intense Competition?
A big challenge for Nio Inc will be increasing sales volumes amidst intense competition.
Tesla’s (NASDAQ:TSLA) gigafactory will be operational by the end of 2019. Initially, Model 3 will be in production with Model Y coming in 2020. Also, Ford Motor Company (NYSE:F) will be introducing at least 10 electric vehicle models in China over the next 2-3 years. In addition, there is strong local competition with almost 500 companies registered to manufacture electric vehicles in China. Of course, there will be industry consolidation in the coming years. It remains to be seen if Nio stock can survive the current phase of cash burn.
The big question: Can the company achieve sales volumes (amidst competition) that help EBITDA margins improve?
I don’t see that likely in the next 12-18 months considering economic slowdown, removal of subsidies and intense competition. The likely implication is that Nio Inc will need to dilute equity or leverage further.
When competition is intense, the investment in R&D and marketing needs to be high. This adds to the financing pressure and I see higher balance sheet stress in the coming quarters.
The Bottom Line on Nio Stock
Nio stock has been on a sustained downtrend, and the downside has been in sync with weak fundamentals and economic conditions. The cash burn is the biggest challenge for NIO and the company is still far from generating sales volumes that help in boosting margins and cash flow. With traditional car markets also entering the EV market, the competition will remain intense. Going forward, the EV industry in China will witness bankruptcies, mergers and acquisitions.
It might still be early to speculate where NIO is headed, but the company might continue to struggle to be profitable at operating level. At some point of time, Nio stock can be a juicy acquisition target.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.