Seeking Alpha: Stock Market Analysis / 2023-06-17 17:041
Bohdan Kucheriavyi
NIO's cash reserves are depleting while the cash burn starts to reach unsustainable levels.
The ongoing price war in the EV industry has already diminished NIO's margins and made it even harder for the business to reach a breakeven point anytime soon.
Given all the challenges that NIO is currently facing, it appears that another capital raise is only a matter of time.
Therefore, it's hard to justify owning NIO's shares for the long term, especially since the business's global ambitions could soon be undermined as well.
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Michael Vi
NIO (NYSE:NIO) is in the middle of a crisis, and it seems that it's only a matter of time before the company announces another capital raise. Due to the relatively weak performance in recent months, the company is unlikely to meet its annual production goals this year, while the ongoing price war within the EV industry has already led to the margin contraction and made NIO reach the unsustainable levels of cash burn. Add to all of this the fact that the company's global ambitions could be undermined due to the lack of pricing advantage along with the increase of geopolitical risks, and it becomes obvious that NIO's upside is limited. Therefore, even though its stock could gain some momentum in the short-term due to the improvement of the overall market sentiment, it's hard to justify owning the company's shares for the long-term given all the challenges that the business faces.
It's Getting Worse
Since the start of the year, NIO has been actively engaged in trying to aggressively expand its business, thanks to the increased demand for electric vehicles in China and across the globe. In late March, the company opened its third showroom in Europe, after which it hinted that it was preparing to launch a small new budget EV for the European market next year. At the same time, back at home, it launched the newest version of its budget-friendly crossover ES6 only a few weeks ago, which has an estimated range from 490 km to 625 km. On top of that, there's also an indication that NIO is about to upgrade the batteries of some of its vehicles, which will come from a semi-solid-state battery supplier in the foreseeable future.
However, despite all of those developments, NIO continues to disappoint its shareholders and makes it hard to consider its stock as a solid investment. Just last week, the company revealed its Q1 earnings results which showed that while its revenues were up 7.7% Y/Y to $1.55 billion, they were nevertheless below the street estimates. At the same time, its non-GAAP EPADS were -$0.36 per share, while the business itself barely managed to meet its quarterly delivery target by delivering 31,041 EVs during the three-month period.
What's worse is that the situation is unlikely to significantly improve in the following months. For Q2, NIO already expects its revenue to be in the range of $1.27 billion to $1.36 billion, which is a decrease of between 15.1% Y/Y and 9% Y/Y. On top of that, it also expects to deliver 23,000 to 25,000 vehicles during the second quarter, which also represents a decrease of between 8.2% and 0.2% in comparison to the year before.
Considering that in April and May NIO already delivered 6658 and 6155 vehicles, respectively, it means that in June alone it needs to deliver at least 10,187 EVs to meet its minimum target for the quarter. While the company could get an additional boost in sales thanks to the recent launch of ES6, there's still a decent chance that NIO could fail to reach its targets given its relatively weak performance in the last two months.
In addition to all of this, in late 2022 NIO's CEO indirectly hinted that he expects the company's sales to be over 200,000 in 2023, while the business's CFO later in March in an interview to Bloomberg said that he's confident that they'll be able to sell 250,000 EVs this year. Considering NIO's relatively weak performance in the first half of the current year, I find it hard to believe that the company will be able to produce over ~140,000 vehicles in the second half of 2023 to reach the goal of delivering even 200,000 EVs.
What's worse is that on top of expecting a decrease in revenues and deliveries in Q2, the company's margins are likely to continue to decrease even more due to the ongoing price war in the EV market. In Q1, NIO's vehicle margins already decreased to 5.1% from 18.1% a year ago, and given the company's latest decision to cut prices for all of its models by $4000, there is every reason to believe that the bottom-line performance would suffer even more in the following quarters. At the same time, by ending the free battery swapping program there's a risk that customers would be incentivized to purchase vehicles of the company's competitors as it would make even less sense to acquire NIO's EVs when one of the most important and popular features is no longer free.
Therefore, as the ongoing price war has no end in sight, and it becomes even harder for the business to stop the cash burn due to the declining margins and increasing expenses, it would be safe to assume that later this year NIO would be prompted to execute another capital raise to stay afloat. Back in 2021, NIO has already executed a $2 billion ATM offering which diluted its shareholders but also increased its liquidity from $6.7 billion in Q3'21 to $8.3 billion in Q4'21. However, after nearly two years after that capital raise the business is still significantly unprofitable and the expected relatively weak performance in the following months along with the increase in competition will make it hard for NIO to reach a breakeven point anytime soon. At the end of Q1'23, the company already had only $4.8 billion in cash reserves and as those reserves dwindle while profits are not expected in the following years, a capital raise appears to be only a matter of time.
Global Ambitions Ruined?
Another issue that NIO currently faces is the inability to properly compete on a global stage. Recently, the company's CEO has indicated that NIO has the ambition to take on the German-based legacy automaker Volkswagen (OTCPK:VWAGY) in its own market by launching a new electric model in Europe at a price of under €30,000. However, NIO is more than likely to face several major challenges that could undermine its European endeavors in the foreseeable future.
First of all, the company plans to produce new models for European consumers back in China in a factory that's currently under a construction. As such, there is every reason to believe that NIO won't have a major pricing power in the European region, since higher shipping costs along with the vulnerability of long-distance supply chains would make it higher for the business to successfully compete with legacy brands that have production facilities in Europe. This is one of the reasons why Tesla (TSLA) has been actively diversifying its supply chains and opened the factory in Berlin last year to have better pricing power in the region.
Add to all of this the fact that NIO's vehicle margins are already thin and are on a decline due to the price war, and it becomes even harder to believe that the company will be able to successfully compete with the well-established names without burning even more cash than today. There's also no guarantee that European consumers would be interested in purchasing NIO's cars in the first place. In Q1, the company sold only 328 of its cars in Europe, while in Q2 so far it sold only 287 of its vehicles there. Volkswagen on the other hand has been selling over 60,000 EVs in Europe each quarter in the last few quarters. Considering this, it's hard to see how NIO plans to establish a solid ground in the region given all the challenges that it currently faces, while at the same time, the potential worsening of the Sino-European relations would make it even harder for the company to aggressively expand in the region in the following years.
What's worse is that NIO hasn't been able to successfully penetrate Europe so far, and yet there are already plans to enter the United States market in 2025. In my opinion, this plan is mostly wishful thinking due to the fierce competition in the region along with the lack of any production facility there as well. In addition, the worsening of Sino-American relations would make it even harder for any Chinese brand to penetrate the U.S. market in the foreseeable future. NIO has already experienced the impact of the ongoing trade war as the implementation of the American export restrictions on chips last year has likely negatively affected its data center infrastructure which was run on Nvidia's (NVDA) A100 GPUs. While Nvidia managed to get around the restrictions by offering a cut-down version of A100 GPUs for the Chinese market, a potential Sino-American confrontation in the future makes it hard to believe that NIO would be able to establish a solid presence in the United States in the future. Add to all of this the fact that there's still a risk that NIO's shares could be delisted from American exchanges due to the issues with audits of Chinese-based firms, and it becomes obvious that the company's global ambitions could be ruined at any moment.
The Bottom Line
Given all the challenges that NIO faces, it's hard to justify the company's current $15 billion market cap. There are already questions about whether the company's global expansion is sustainable in the long-term, while the ongoing price war in the EV industry would make it even harder for the automaker to stop the cash burn and become profitable. The street currently believes that NIO could reach a breakeven point in 2026, but a potential further margin contraction along with the potential inability to reach its delivery targets for this year could make those expectations sound too optimistic. As such, I believe that there's no point in even bothering to invest in the company at this stage as capital raise is likely around the corner given the unsustainable cash burn levels.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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This article was written by
Leader of BlackSquare Capital
Event-driven portfolio strategies for the changing geopolitical landscape
My passion for investing started when I was studying at a Ukrainian high school. It was at that time when I took a small loan from my parents and opened a brokerage account to learn in practice what's it like to own and trade stocks of real businesses. After high school, I enrolled at the university to study international relations and at the same time landed a job as a proprietary trader in a local prop firm.
It was there that I started to combine my academic knowledge with a passion for investing to build an all-weather portfolio that could overcome periods of constant economic and political uncertainty. Given the systemic shocks that have been happening to Ukraine in the last decade, I saw firsthand what's it like to live in an environment where there's too much unpredictability and no guarantee that your endeavors won't fail. Despite this, I managed to show strong returns and since 2015 have been sharing some of my ideas here on Seeking Alpha.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
Bohdan Kucheriavyi and/or BlackSquare Capital is/are not a financial/investment advisor, broker, or dealer. He's/It's/They're solely sharing personal experience and opinion; therefore, all strategies, tips, suggestions, and recommendations shared are solely for informational purposes. There are risks associated with investing in securities. Investing in stocks, bonds, options, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Loss of principal is possible. Some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including greater volatility and political, economic, and currency risks and differences in accounting methods. A security's or a firm's past investment performance is not a guarantee or predictor of future investment performance.
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