Nio Inc (NYSE: NIO) had a rough debut in the United States market, but quickly recovered. Following the debut, the stock has been running up as excitement hits investors. However, I’m here to tell you that this stock isn’t all it’s cracked up to be. You may want to get out before it’s too late. Today, we’ll talk about:
- Why NIO is likely to fall ahead;
- what we’re seeing from the stock today; and
- what we’ll be watching for moving forward.
Why NIO Is Likely To See Big Declines Ahead
Nio is often looked at as the Tesla (TSLA) of China. While this is currently being viewed as a good thing, with Chinese mandates requiring some consumers and companies to upgrade to electronic vehicles, the truth of the matter is that the similarities between the two are a bit too much for me.
The truth is that the company faces a lot of the same issues that Tesla does. First and foremost, the company’s cash burn rate is ridiculous. As it tries to ramp up operations in China, it is burning through boat loads of cash and simply doesn’t have the funding it needs to sustain its spending.
Moreover, NIO said that it intends on selling 50,000 vehicles by 2020 and 160,000 vehicles by 2025. The question is whether or not the premium electronic vehicles segment is big enough to support the company’s ambitious goals. In my opinion, it is not.
While investors look to the changing tides in the Chinese market as a reason to be excited about the electronic vehicle producer, there’s one big factor to keep in mind. The first issue with this is who the company will be selling vehicles to. Currently, there is a concentration of demand for electronic vehicles in large cities that are putting license-plate restrictions into place. Demand outside of these larger cities is minimal. Therefore, the company will only be selling to a small corner of the market.
Moreover, NIO seems to lack the distribution scale it needs to hit those numbers. Think about it, Tesla has more than 30 locations in China and only sold 17,800 cars in the region last year. At the same time, NIO plans on having 12 locations by the end of the year, about a third of what Tesla has, but the company plans on selling more vehicles. Those numbers just don’t add up.
To make matters worse, the company may move forward with a dilutive offering relatively soon. Like Tesla, NIO is struggling with incredibly high costs. At the same time, they offer a relatively low price point, making margins paper thin. With expenses that are growing at an incredible rate, it’s unlikely that the company will be able to sustain operations as it sits. So, in the near-to-mid-term, NIO is likely to move forward with a dilutive move in order to access the funds it will likely desperately need.
All in all, recent gains seem to be the result of excitement surrounding a potential win with electronic vehicles in China. However, when we dig into the details, the reality is that the company has a rough road ahead.
What We’re Seeing From The Stock
It’s not uncommon for recently public companies to get investors excited and see strong runs in the beginning. That’s exactly what we seem to be seeing out of Nio. Yesterday, the stock was up more than 75% at the close and today the gains are continuing. Of course, our partners at Trade Ideas were the first to alert us to the movement. At the moment (7:16), NIO is trading at $14.14 per share after a gain of $2.54 per share or 21.90% thus far today.
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What We’ll Be Watching For Ahead
Moving forward, the CNA Finance team will continue to keep a close eye on NIO. In particular, we’re interested in following the stock to see how long it takes for investors to come to the realization that Nio isn’t all it’s cracked up to be. When this happens, we believe that the stock will tank. Nonetheless, we’ll continue to follow the story closely and bring the news to you as it breaks!
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