Given the vast host of negative factors weighing on NIO, its current share price cannot be justified. Investors would be wise to steer clear of this name, at least on the long side.
Apr. 9, 2020 11:07 AM ET, by John Engle
Summary
– NIO has been short on cash since mid-2019, a situation that has not improved since; the EV company has only managed to keep the lights on through multiple capital raises.
– NIO’s share price continues to reflect considerable investor optimism; this seems unfounded, based on slowing sales, a deteriorating balance sheet, and severe macroeconomic pressures.
– The coronavirus epidemic has caused widespread disruption in the Chinese and global economies; the domestic auto industry has taken a severe hit, throwing NIO’s growth plans into doubt.
– Management has published a going concern notice; even in a best-case scenario, investors will likely have to endure substantial dilution as NIO is forced to turn to capital markets.
– NIO is uninvestable at its current price.
Despite being on financial life support for months, NIO (NIO) ended 2019 with some positive momentum. After a tough year, which depleted the cash reserves of the Chinese luxury electric vehicle (“EV”) maker, NIO hoped to bounce back in 2020. Unfortunately, the outbreak of the coronavirus epidemic, combined with a poor showing in Q4 2019, appears to have scuttled the company’s chances of a turnaround. The automaker’s share price has dropped in the wake of factory closure and economic disruption.
With China grappling with the effects of the coronavirus epidemic on its domestic economy, as well as the continuing global economic downturn, producers of expensive luxury goods are heading for trouble. With extremely limited cash reserves, NIO is already fighting for survival. I doubt it can succeed.
Lackluster Q4 and Weak Guidance Blunt Momentum
NIO reported earnings for Q4 2019 on March 18th. It sold 8,224 vehicles during the quarter, including 6,824 ES6 five-seat mid-size SUVs and 1,800 ES8 seven-seat SUVs. This resulted in $409.1 million in revenue, a narrow beat of the analyst consensus estimate. However, revenues were still down 17.1% year-over-year, which is rarely a positive sign for a growth company.
Moreover, NIO fell short of market expectations on the bottom line, reporting a $411.5 million net loss – a 13.6% increase sequentially. This translated to a GAAP loss of $0.39 per share, significantly worse than the $0.32 per-share loss that had been expected.
During the March 18th earnings call, NIO provided disappointing guidance for Q1 2020. The company said it expected to deliver between 3,400 and 3,600 vehicles during the quarter, a sequential drop of more than 50%. NIO anticipated revenue of 1.209 billion yuan to 1.273 billion yuan, or between $173 million and $182 million. This top line guidance fell far short of Wall Street expectations; analysts had anticipated revenues reaching 2.48 billion yuan, double the low end of NIO’s guidance.
With the coronavirus epidemic having already mauled the Chinese economy, and with much of the global economy on the verge of shutting down, a downward revision was to be expected. Even so, the market still reacted violently, if unsurprisingly, to the news. Shares tumbled more than 20% in premarket trading on March 19th.
Q1 Delivery Beat Sparks False Hope
NIO was in the doldrums amid concerns of a delivery collapse in Q1. However, NIO’s shares were jolted back to life on April 7th after the company reported surprisingly strong March delivery numbers before the market open. NIO delivered 1,533 during the month, up 116.8% from February. With total deliveries in Q1 reaching 3,838 vehicles, NIO managed to exceed the high end of its guidance by 6.6%.
NIO’s stock rallied on the news, jumping in premarket trading and maintained its strength through the trading day to close at $2.70, up 9.3% from the day before. This positive investor reaction can hardly be called surprising, given the circumstances. However, it belies the continued problems facing NIO.
While NIO managed to exceed the high end of its updated Q1 delivery guidance, it was still a substantial sequential drop. Perhaps more worrying, NIO’s Q1 deliveries were also down year-over-year. In Q1 2019, the company managed 3,989 deliveries. Moreover, investors should also consider the fact that NIO had provided its guidance of 3,600 deliveries on March 18th, less than two weeks before the end of the quarter. Management may well have set its guidance range with the intention of creating a target that was easy to beat.
The impact of the coronavirus is far from over, and the domestic economic disruptions cannot be understated. Indeed, as auto journalist E.W. Niedermeyer has observed, the economic shocks from the coronavirus epidemic may prove to be the catalyst for a general collapse of the Chinese auto market. While not all auto analysts are quite so apocalyptic in their thinking, most foresee a long period of trouble ahead.
According to Wall Street Journal’s Trefor Moss, for example Chinese auto sales may end up seeing a 25% year-over-year decline in the first half of the year. Operating as a niche luxury EV manufacturer under such inauspicious market conditions makes NIO’s current position all the more precarious.
Another Cash Crunch Is Coming
With its cash balance all but depleted, NIO has been running on empty for many months. A series of emergency capital raises kept the lights on through 2019, but the company has failed to escape its precarious financial position. NIO started the year with $151.7 million in the bank. On March 5th, the company announced that it had secured yet another capital injection, raising $235 million through the sale of zero-coupon convertible notes.
NIO’s current cash balance can only be estimated, but one can surmise that the company continued to burn cash at an alarming rate during Q1, as it has done since its inception. Indeed, the $235 million raised on March 5th may be nearly exhausted, based on the company’s 2019 burn rate. This fact has not been lost on NIO’s management. The company’s March update included a going concern notice for the first time:
“Based on the management’s assessment, as a result of the relevant conditions and events including continuous losses, net cash outflows, negative working capital, negative equity and uncertainties on consummation of the financing projects, there is substantial doubt about the Company’s ability to continue as a going concern.”
NIO will have to raise a great deal of capital simply to survive. That should give investors pause, especially in a time of such widespread macroeconomic turmoil.
Investor’s Eye View
Despite its latest declines, NIO continues to enjoy substantial investor support. With a market capitalization of $2.84 billion, there is still a lot of positive expectation priced in. At this point, such enthusiasm appears rather misguided. Unsustainable cash burn, broad economic turmoil and disruption and a saturated domestic auto market add up to a rather dreary outlook.
To survive, NIO will have to continue raising capital. That may prove increasingly difficult given the worsening macroeconomic environment. Even in a best-case scenario, the company will likely have to raise massive amounts of capital to sustain its operations, likely upward of $1 billion over the course of the next year. That will almost certainly mean punishing dilution for shareholders.
Given the vast host of negative factors weighing on NIO, its current share price cannot be justified. Investors would be wise to steer clear of this name, at least on the long side.
Source: seekingalpha.com