With almost every passing week, the price of Nio (NYSE:NIO) stock continues to decline. Following its recent weak earnings report, Nio stock price plummeted to fresh depths. It broke the $2 mark, and reached a new all-time low of $1.19 before bouncing.
Be careful about holding Nio stock too long following any rebounds, however. The stock is merely a vehicle for momentum traders at this point. Given Nio’s poor fundamentals and dangerous balance sheet, buying the stock is gambling at this point, and the chance of Nio stock price hitting $0 has increased. Here’s why all but the most risk-seeking of readers should avoid NIO going forward.
Nio’s Cash Crunch Intensifies
It’s hard to exactly quantify Nio’s current balance sheet issues. As a foreign company, Nio has less stringent reporting requirements than American firms. We do know, however, that Nio reported burning through more than half a billion dollars last quarter.
Yet it had just $503 million of cash at the end of June, suggesting the company should be just about out of money by now. Because of that, Bernstein downgraded Nio stock and slashed its price target on the name to just 89 cents. The firm thinks that Nio may run out of working capital.
And a new issue emerged on Monday which may worsen Nio’s problems. Contemporary Amperex Technology Co. Limited – or CATL – announced it will be making its customers pay for its products immediately. CATL, you may recall, was also the firm that produced the batteries which led to Nio’s recent nearly $50 million product recall.
Regardless, CATL now wants to get paid immediately for its products, instead of extending credit to its customers. That’s in sharp contrast to CATL’s previous policy of allowing the majority of payments up to three months after its products were delivered. That change could cost NIO tens of millions of dollars at a time when the company is looking around for cash.
Is Help on the Way for NIO?
It’s becoming increasingly clear that Nio will not be able to survive unless it quickly gets funds from an outsider.Without a massive injection of cash, Nio simply won’t be able to keep operating long enough to turn its fortunes around. And unlike Tesla (NASDAQ:TSLA), Nio simply doesn’t have many wealthy backers who will keep propping up the firm as bad news hits.
But there are reasons to believe that an outside suitor might be interested in trying to salvage NIO. Recently, for example, Nio reported higher than expected delivery numbers. While I am mostly bearish on NIO stock, its cars seem well-designed, and elements of its marketing strategy are savvy. If the company had access to more capital and a highly respected backer, its business could be viable.
That said, who is going to step in and provide the much-needed capital? In September, Nio was supposed to raise $200 million by selling convertible debt. Nio’s CEO and Tencent (OTCMKTS:TCEHY) were going to help finance the deal. It seems, however, that this deal failed to close, as there’s still no sign of the $200 million. Even if the delayed funds end up coming through, at Nio’s current cash burn rate, it would keep the company afloat for less than half a quarter.
More recently, Wuxing, a local Chinese government, was in talks to offer Nio a rescue package. Wuxing was supposed to give between $700 million and $1.4 billion to Nio in return for Nio stock and the company’s promise to build a new factory in its territory. However, Wuxing apparently walked away from the deal, citing high risks.
The Verdict on Nio Stock
As I said previously, Nio stock should be avoided at any price, as the company is in a death spiral. Nio stock has lost another 25% of value since that column was published. It’s tempting to believe that, since Nio stock price is below $1.60, the worst must be over. But when there’s a real possibility of the stock going to $0, buyers of Nio stock can lose 100% of their money, regardless of what price they buy it at.
The bond market is making it loud and clear that Nio needs a rescue package. And there’s no guarantee that Nio stock will have much if any value after a rescue. In a variety of scenarios, including a bankruptcy filing, a massive dilutive share offering, and selling off the brand name, Nio could continue to operate while leaving its U.S. stock with little or no value.
The company has very cool products, and some of its marketing strategy seems like it could work in theory. But it needs capital to make these things happen. And Nio has clearly just about run out of capital.
Without a captivating leader like Elon Musk to raise money, Nio’s ability to survive is far weaker than Tesla’s. And unless something dramatic happens soon, Nio’s time could be up within a matter of months or even weeks. I know Nio stock price has already plummeted a great deal. But its fall could easily continue.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.