Nio (NYSE:NIO) has been in the fast-line lately. Since early October, Nio stock has soared from $1.30 to $3.70 – putting the market cap at $3.8 billion.
There are several drivers for this bull move. First of all, the company has been showing positive momentum with its deliveries.
In December, they came to 3,170, up 25.4% on a month-over-month basis (there has been five consecutive months of growth). The main reason was the strength of the ES6 (this is a 5-seater premium SUV) and the ES8 (a seven-seater SUV).
Next, the parabolic rise in Tesla (NASDAQ:TSLA) stock is another factor. For many investors, this is a clear-cut sign that the EV space has reached a tipping point.
And finally, NIO stock has benefited from a large short position. Keep in mind that about 18% of the float is in short positions. So as NIO stock has spiked, this has forced short sellers to cover their positions – which has added to the buying.
The Risks
Despite the recent good news, investors should still be cautious. NIO stock has a history of extreme volatility. And I think the next few months could see much more pressure on the downside.
The main reason? Well, yes, it’s the coronavirus from China. It really does look like Wall Street has not factored in the potential adverse impact on NIO stock.
The coronavirus has already exceeded the deaths suffered during the SARS outbreak, which happened in China from 2002 to 2003. To deal with the current crisis, China has taken the unprecedented steps of massive lockdowns and quarantines of cities, affecting more than 60 million people.
Even before this, the country was already seeing a deceleration of economic growth. Last year, the GDP increased by 6.1%, which was the slowest pace since 1990.
According to Evercore ISI Chairman Ed Hyman: “Our team has GDP growth at zero for the first quarter … China is really slowing and that’s worrying people for sure.”
Note that he is ranked as one of the top economists on Wall Street.
For a company like NIO, this is likely to mean a fall-off on sales. When there is widespread uncertainty, consumers generally pull back making purchases on big-ticket items. And NIO cars fetch premium prices.
But another issue is the supply chain. China relies heavily on temporary workers. In other words, when factories re-open, there may not be enough labor to fill the needs.
Bottom Line on NIO Stock
The cash position for NIO is at perilous levels, with only $374 million in the bank. This includes $100 million raised recently from convertible securities.
Yet the company will need to raise more – and fast. The burn rate has been rapid and it is will accelerate if sales plummet.
For example, from Q1 of 2019 to Q3 of 2019, the cash balance went from $1.1 billion to $274 million. The company also has a hefty $1.2 billion of debt on the balance sheet.
In the most recent press release from NIO: “The Company is currently working on several other financing projects, the outcome of which is uncertain at this stage.”
In the meantime, NIO also has to deal with an intensely competitive environment, with rivals like TSLA, Ford (NYSE:F), Volkswagen (OTCMKTS:VWAGY), BYD (OTCMKTS:BYDDF). In fact, there are well over 400 players in the market!
Again, for the most part, Wall Street has not factored in the potential downsides. And besides, NIO stock is far from being the next Tesla either — in terms of scale, technical capability and resources. So for now, it’s really tough to see a bull case.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.