NIO: Here Comes The Light In The Darkness

Summary

• NIO delivered the best monthly sales numbers in October.
• NIO entered into a strategic collaboration with Intel-owned autonomous driving company Mobileye.
• The company resents high-risk, high-return opportunity, where the major concern is still on its financial stress.

Investment Thesis

Two major positive news has sent the share price of NIO Inc. (NYSE:NIO) more than 50% higher in just two days. Currently, the financial stress is still the main theme for NIO. But given the share price is so low, any fundamental change to its funding outlook will send the share price rocketing. This presents a "high-risk, high-return" for investors.

Sales Numbers from October

NIO announced their October deliveries numbers on November 4th. In last month, NIO delivered 2,526 vehicles, including 2,220 ES6s and 306 ES8s. This marks October as the best month in 2019, increasing 25.1% from the strong delivery in September.

These strong numbers have delivered two important messages to investors:

• First of all, it shows that consumers still hold faith in the NIO brand. All financial stress aside, NIO still has a good reputation among its customers. Strong sales numbers in such a sloppy auto market environment is a big plus for the company. If NIO is able to keep the strong deliveries in the coming months, the possibility of the next round of financing will be largely increased
• Secondly, the EV market is still attractive in China. The strong numbers from NIO is a good endorsement of China's EV market. As long as NIO still can qualify itself as a high-growth company, it should be able to find continuous funding for its "Tesla dream".

Strategic Collaboration with Mobileye

Another big news released by NIO on Tuesday (11.05) is that the company is entering into a strategic collaboration with Mobileye (OTCPK:MBBYF), an Intel (INTC) company that develops vision technology for Advanced Driver Assistance Systems (ADAS) and autonomous driving, to provide:

highly automated and autonomous vehicles (AV) for consumer markets in China and other major territories. As part of the planned cooperation, NIO will engineer and manufacture a self-driving system designed by Mobileye, building on Mobileye's level-4 (L4) AV kit. This self-driving system will be the first of its kind, targeting consumer autonomy, engineered for automotive qualification standards, quality, cost, and scale. NIO will mass-produce the system for Mobileye and also integrate the technology into its electric vehicle lines for consumer markets and for Mobileye's driverless ride-hailing services. This variant will target initial release in China, with plans to subsequently expand into other global markets.

The news sent NIO's share price up by over 36% on the trading day:

Source: NIO

We believe there are several merits regarding this news that led to a positive response from investors:

• First of all, this will bring short-term liquidity to the company. Although no financial details of the partnership were disclosed in the news, we believe NIO should have got a capital injection from Mobileye. Currently, as we have discussed previously, NIO's top priority is to get external financing to support their ongoing business operations. Any meaningful "collaboration" should come in some form of improved liquidity for the company. Mobileye, on the other hand, is in urgent seek of application and market for their technology. Backed by Intel, the company should be able to afford this type of "capital for market" collaboration. For them, the Chinese market would be a perfect target, as the CEO of Mobileye, Amnon Shashua stated:

a rollout in China was more efficient as the regulatory environment was centralized and the Chinese government was working on standardizing Mobileye's safety model for self-driving cars into law.

• Second, the collaboration eyes a positive outlook for NIO in the long run. Based on the news, both companies plan an initial release in China beginning in 2022. This means that from Mobileye's perspective, NIO should be able to at least survive in the following two years and should have the ability to "mass produce the system for Mobileye's driverless ride-hailing services and also plans to integrate the technology into its electric vehicle lines for consumer markets". For a company whose share price has been struggling in the capital market, this optimism may play a more important role than a pure capital injection.

Risk Factors

Despite the recent positive news from the company, the biggest concern for NIO is still their financial situation. The short-term sales boost and strategic collaboration with Mobileye might not be able to bring meaningful improvement to the financials. We should be able to get a clearer tell from Q3 results.

Conclusion

We still believe that financial stress is the main concern for NIO at the current stage. Recent positive messages show continuous effort from the company and potential improvement in its financials. For risk-takers, the company presents attractive returns with high risk.

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.