Nio (NYSE:NIO) reported its fourth-quarter results on March 18. Although they beat on the top line, its losses were higher than analysts expected. Nio stock lost 16% of its value Wednesday. Down 40% year to date through March 18, it now trades well below $3.
The first case of coronavirus in China came on Dec. 10. That means Nio’s Q4 2019 report included just 22 days with the coronavirus out of a 70-day quarter. Investors can’t blame any of the company’s weaknesses on the outbreak.
Now, Nio’s had to deal with a Chinese economy that collapsed in the first quarter — retail sales in the first two-and-a-half months fell 20.5%, five times worse than analyst predictions — and is on the verge of a recession.
Macquarie Group analyst Larry Hu believes that China’s economy will contract by as much as 6% in the first quarter over last year.
Nio was struggling to find a financial lifeline before the coronavirus took hold. I have to believe its Q1 2020 numbers will be atrocious.
Is Nio stock ready to go to $0?
What We Already Know
Nio delivered 1,598 vehicles in January, 11.5% less than in January 2019. CEO William Li was happy with the results, saying, “We achieved satisfactory results in January despite the outbreak of novel coronavirus.”
In February, Nio delivered 707 vehicles, 12.8% lower than in the same month in 2019. That’s despite a 78% decline in overall vehicle sales in China. Nio’s stock jumped on the news. As a company, Nio has delivered a total of 34,218 vehicles in its brief history.
As for the fourth quarter, it delivered 8,224 vehicles, 3.1% higher than a year earlier. Unfortunately, the higher number of vehicle deliveries translated into a 17.1% decline in revenue year over year to $409.1 million. On the bottom line, it lost $403.7 million or 39 cents a share. Analysts were expecting a 33-cent loss.
But the company’s CFO, Wei Feng, is upbeat about 2020.
“We have put great efforts to optimize our organizations and to improve operation efficiency, which resulted in certain one-off expenses in the fourth quarter. However, we believe that these efforts will significantly reduce our operating expenses and improve our cash flows in 2020 and beyond,” Feng said.
In the first quarter, Nio expects vehicle deliveries and revenues to drop by as much as 15% and 26%, respectively.
As I said earlier, it’s going to take a Herculean effort on the company’s part to keep the company operating. I have serious doubts if it can do it with Tesla (NASDAQ:TSLA) breathing down its neck.
Is Nio Stock a Buy Below $3?
InvestorPlace contributor Laura Hoy wrote an excellent piece on March 18 explaining the pickle Nio’s found itself. It’s caught in a vicegrip that’s squeezing the life out of it.
Hoy points out that the company’s deal with the Hefei government eases its near-term cash flow problems but could make them worse in the long run because it will have to spend money to relocate its operations to the Chinese province of Anhui. I like her analogy that the company “put a bandaid on a bullet-hole.”
The last time I wrote about Nio was in February. I suggested the smarter play was to buy Tencent (OTCMKTS:TCEHY), the Chinese internet giant, whose investment in Nio represented less than 1% of its market cap.
As I write this, Nio is down 48% since Feb. 25; Tencent has lost 16%. Nio stock is not a buy under $3.
Is Nio headed to $0? It could very well be.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.