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Nio: Trouble Just Keeps Rising

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About: NIO Limited (NIO)
by: Bill Maurer
Bill Maurer
Long/short equity, long only, short only, Growth
Summary

January sales update not very good.

Short-term financing won't solve major problem.

Coronavirus impact not yet fully measurable.

One of the wildest rides in the market over the past year has come from shares of Chinese electric vehicle maker Nio (NIO). As the chart below shows, the stock lost almost 90% of its value from peak to bottom as last year's results failed to impress, but then, the stock strangely soared after the company essentially issued a going concern warning. One thing is clear right now, and that is that Nio remains in a bit of trouble.

(Source: Yahoo! Finance)

Last month, shares of the company rallied strongly after a rumor that it had struck a major financing deal, but it turned out that wasn't the case. With the company burning through a large amount of cash as tremendous losses piled up, it was only going to be a matter of time before another capital raise was needed. In early February, the company did strike a small deal in the form of one-year convertible notes that can be exchanged for stock at $3.07, well below the current share price.

As everyone knows, China, right now, is in an uncertain place with the spreading coronavirus, limiting factory output across a variety of industries. In late January, the country's new year holiday also contributed to some factory shutdowns, and the virus news is constantly changing. We, recently, got Nio's press release detailing January 2020 sales, and the news wasn't good:

NIO delivered 1,598 vehicles in January 2020, 11.5% lower than the same month last year. This decrease was primarily due to the reduction in business days in January due to the comparatively earlier Chinese New Year holiday in 2020. The extended holiday due to the unfortunate outbreak of the novel coronavirus first identified in Wuhan, China also affected our sales results. January 2020 deliveries consisted of 1,493 ES6s, the Company's 5-seater high-performance premium electric SUV, and 105 ES8s, the Company's 7-seater high-performance premium electric SUV and its 6-seater variant.

Now, the above statement is true about total deliveries coming down year over year, but it doesn't tell the entire story. Last year, all 1,805 deliveries in the month of January were of the higher priced ES8 model, as the cheaper ES6 had not launched yet. So really, sales of the more expensive model were just a small fraction of the year-ago period. Thus, not only were unit sales down meaningfully year over year, but the sales mix dramatically changed as well and not in a good way.

If you want to look at results on a sequential basis, comparing Q4 2019 to the current period, things are even worse. For the month of October, NIO detailed 2,526 vehicles being delivered, consisting of 2,220 ES6s and 306 ES8s. As the company mentioned in the press release, that period was also impacted by the seven-day National Day holiday, but it was a better month than January 2020 was.

Nio management in the most recent release has acknowledged the current business climate will be hurt by the coronavirus, stating that February production and deliveries would be down from the months of peak sales last year. However, they did not give any specific numerical guidance because they likely don't know at this point how long this virus impact will last. 2020 was really supposed to be the company's breakthrough year, but expectations will definitely have to come down a bit. Also, the company has reportedly delayed payroll again and is offering an increase in compensation to employees for taking their end year bonus in stock.

In the end, it will be interesting to see how long it is before Nio needs to find another financing source. Just as sales trends were starting to improve at the end of 2019, the coronavirus is really going to hurt the company in early 2020. January sales did not turn out well, and February will be even worse thanks to factory shutdowns and such. Until this company gets back on its feet and can start to get production and sales moving in the right direction, it's going to be a hard stock to hold on to, knowing how bad the financial situation was before this major headwind started.

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.

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