NIO's High Flying Debut Will Crash Soon

Summary

• NIO is flying high after its recent debut in the US market.
• While investors compare the company to Tesla, many aren't paying attention to the painful similarities between the two.
• With ambitious production targets, the company has set the stage for failure early on.
• Financially, things look no better, as the company burns through massive amounts of cash and will likely need to access funds in the near-to-mid-term.
• In my view, the stock is going to crash relatively soon.

NIO (NYSE:NIO) is making waves in the market after going public just a few trading sessions ago. On Thursday, September 13, 2018, the stock climbed from $6.60 per share to $11.60 per share as more and more mainstream outlets compared the company to Tesla (TSLA), hyping up excitement around the stock.

However, in case you haven't been following Tesla, a comparison to the company isn't always the best thing. The truth of the matter is that these two companies may be too similar, including similarities in overly-ambitious production targets and the potential need to access capital through a potentially dilutive transaction within the next couple of years.

With massive spending and production-related disappointments likely ahead, I believe that NIO shares are headed for declines ahead.

The NIO/Tesla Comparison Is Uncanny

NIO is, in a nutshell, the Tesla of China. The company's claim to fame is the production of high-end electric vehicles. Here are a few brutally obvious similarities between the two:

• Electronic Vehicles - Both NIO and Tesla are manufacturers of electric vehicles.

• Expensive Vehicles - Tesla's vehicles are, for the most part, very expensive, many of which have price tags in the six figure range. Although NIO does offer vehicles at a steep discount relative to Tesla's prices (in general), its vehicles are pretty expensive as well. The company recently announced the price of its first production vehicle, the ES8, which will come with a price tag of $67,765. While many are comparing this to Tesla's six figure Model X, they fail to mention Tesla's Model 3, which has a price tag of just under $50,000. Irregardless, both car makers offer higher-end vehicles that are, at minimum, about twice the average cost of a new vehicles.

• Investor Hype - Tesla is one of the most talked about stocks on the market today; this has led to the company's market success and a price that, based on various articles within the Seeking Alpha Tesla feed, is overwhelmingly high. On the other hand, NIO hit the market with a splash, creating waves of investor excitement that led to a dramatic run in value. Within a couple of sessions, the stock was trading at nearly double its IPO price. Based on this run, one could argue that investor hype has led to unsustainable gains in the value of the stock.

The More Painful Similarities

The above is simple. We have two electric vehicle manufacturers that offer higher end vehicles and garner investor hype. Looking past that, we start to find the more painful similarities between the two companies. The largest of these painful similarities is the ambitious production targets.

When Tesla announced that the Model 3 would be its first mass-production vehicle, investors cheered. This would be the move that would take the company to the next level. Along with the announcement, Tesla said that it would produce 1,600 Model 3 units by September. By October, it became apparent that these goals were far too ambitious. The company announced that it only produced 260 vehicles, missing its production goals by more than 80%. Since then, the Model 3 has been marred with production delay after production delay as the company continued to miss targets.

NIO is also very ambitious when it comes to production targets. The company plans on selling 50,000 vehicles by 2020. This target is a huge one that analysts at Bernstein have already raised questions about.

Breaking down this goal, the company would need to sell 1,852 vehicles per month from October 2018 through December 2020 (27 months) to hit this target. That sounds doable at first. On the other hand, there are a few big risks that could keep the company from hitting these targets:

• Time To Full Production Capacity - It is highly unlikely that NIO is producing anywhere near 1,852 cars per month at the moment. To get to this level, the company will have to operate incredibly efficiently, and to do so, it will need time in production to tweak processes. This will likely take about a year or so. I come to this conclusion as it took Tesla just over a year to finally hit a production target with regard to the Model 3.

• Supplier Delays - Auto manufacturers don't usually manufacture every aspect of their vehicles. NIO, Tesla, and any other automobile manufacturer all rely on suppliers of components to complete vehicles. In fact, one of the big issues that Tesla faced in getting Model 3 production up to par was an influx of inadequate parts being delivered by suppliers.

• Demand - NIO sold out of its first 10,000 Founder's Edition ES8 reservations relatively quickly. Some may argue that this is proof that demand will be high. On the other hand, innovative new options often receive a high level of demand from the "be the first crowd". Something that Tesla had going for it when it announced the Model 3 is a strong name. NIO doesn't quite have that yet. NIO was founded in 2014, more than a decade after Tesla was founded in 2012. So, when Tesla set its ambitious production targets, it already had more than a decade and a half in operation. NIO has only been around for 4 years and is a far less recognizable brand. Although demand was relatively strong for the first 10,000 reservations, this demand could taper off greatly once the "be the first crowd" moves on and NIO is more reliant on the general population.

NIO Is Burning Through A Massive Amount Of Money!

Another massive similarity between Tesla and NIO is the fact that the two companies operate in the red. While Tesla has been around for more than a decade and a half, it has yet to generate a profit. Not to mention that losses per share continue to climb! NIO may be following in the same shoes. According to the company's most recent 10-K, the financial picture is anything but pretty.

In the filing, the company that is just starting to generate revenue produced an incredible loss. During the year 2017, NIO lost a whopping $737.58 million. These losses are widening tremendously, representing nearly double the $381.77 million lost in the year 2016. As a new, high-end automobile manufacturer, the company is spending massive amounts of money on R&D, which represents about half of the loss reported in the 2017 fiscal year.

A Dilutive Offering May Be On The Table Within The Next 2 Years

When reading that subheading, the first thing that comes to mind might be "NIO just raised a boatload of cash, why would it need to access funds?" The answer is simple. Raising $1 billion in an IPO is an impressive feat. The company also had $1.15 billion at the end of fiscal 2017. That sounds pretty good, $2.15 billion should last at least a little while.

For most companies, yes. For NIO? Not quite. Assuming that the rate of loss doesn't grow at all, which I believe is highly unlikely, NIO will burn through $2.15 billion in about 34 months. On the other hand, a stagnant rate of loss is highly unlikely.

From 2016 to 2017, NIO's net losses grew by 93.2%. Even if the company did very well and cut the growth in its losses to 50% in 2018, the company will lose $1.1 billion. Although I do believe that vehicle sales will generate some revenue, it is unlikely that revenue will be higher than the tens of millions mark throughout 2018 and into 2019. As a result, with the company's rate of growth in net losses in mind, as well as its minimal potential to generate substantial revenue in the near future, I believe that it has enough money to make it through the next two years, and that's if things go well. As a result, I would not be surprised to see a dilutive transaction in the mid-term (within the next 2 years or so).

The Takeaway

NIO is a compelling company as its products are the culmination of the combination of tech and automobile innovation. Although the company is interesting, interest doesn't always warrant investment. The truth of the matter is that NIO is a very young company with a lot to prove. As the company is new to the generation of revenue, there is no real history to go off of, which makes NIO a highly speculative investment in my opinion.

Moreover, the company's ambitious production and sales targets are reminiscent of those of Tesla, which we all know did not go well. I believe that the company's high ambitions could lead to disappointment when it reports actual production and sales numbers, which could become a large downside risk.

Finally, NIO is losing huge amounts of money quickly. It has accessed the capital markets out of necessity, and at the current rate of growth in its net loss, it will likely experience the same necessity within two years. In my view, if you're going to consider NIO as an investment, it would be wise to strongly consider the risks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.