It's often a warning sign when a stock slips under $5 a share.
Also known as penny-stock range, the $5-and-under bin is generally reserved for companies that have fallen from greater heights: busted start-ups, legacy companies that failed to adapt and are now creeping toward bankruptcy, or struggling turnaround plays. Many are maneuvering to avoid falling below $1, where they would run the risk of being delisted from major exchanges.
However, occasionally investors can find a steal in the bargain bin. Companies that have already lost so much of their value can have huge upside potential for long-term investors, if it turns out that they were only facing temporary setbacks.
Shares of China's top online used car dealer have taken a roller-coaster ride since its IPO last June. The offering was priced at $9 a share, but Uxin's timing was unfortunate as Chinese stocks broadly fell last year amid concerns about a slowing economy and trade tensions with the U.S.
After falling steadily throughout the second half of 2018, the stock surged in December after the company announced a partnership with Alibaba's (NYSE: BABA) Taobao marketplace to open an online shopping mall. The Uxin Taobao Marketplace facilitated 2,000 used car sales in the first 18 hours of Taobao's Double 12 shopping holiday on Dec. 12.
However, the stock promptly gave back nearly all of those gains, and after a more modest bump in 2019, shares have fallen below $3.
Uxin is still significantly unprofitable -- it generated an operating loss of $373.9 million last year. But it's taking steps to narrow its losses. It held sales and marketing expenses flat in the fourth quarter, and slashed its operating loss by nearly half to $38.8 million. Since sales and marketing is the company's biggest expense category, Uxin should reach profitability sooner than most observers think if it can continue to control marketing spending.
Meanwhile, its top-line growth remains impressive, as does the long-term opportunity in front of it. Revenue jumped 70% last year, and 61.6% in the fourth quarter; analysts forecast a further 54% increase this year.
China is now the world's biggest car market, and Uxin accounts for more than 40% of online used car sales in the country. Its marketplace model, under which it makes money on commissions and loan facilitation, should eventually turn profitable; most mature e-commerce marketplaces are high-margin businesses.
Considering its growth rate, the stock looks cheap at price-to-sales ratio of less than 2, and with a market cap of under $1 billion, it's much smaller than its $12.7 billion American counterpart, Carmax. Another catalyst like the Taobao tie-up or improving financials could send Uxin stock surging higher.
Another intriguing Chinese company is premium electric car-maker NIO. Its share price recently dipped below the $5 mark after it gave disappointing guidance in its fourth-quarter earnings report.
NIO sometimes draws comparisons to Tesla, though those are probably premature, as NIO only started delivering cars in the past year. Still, the company could have a bright future ahead of it. It has received backing from Chinese heavyweights Tencent and Baidu, and the long-term opportunity for electric vehicle manufacturers looks bright because of the country's urban areas that are notorious for air pollution.
However, car sales have begun in decline in China for the first time in two decades due to fears of an economic slowdown, and also due to the expiration of temporary tax break at the end of 2017.
In its March earnings report, management predicted its car deliveries would fall sequentially in Q1, and indicated that it saw challenges continuing into Q2 due a cut in a key EV subsidy, as well as ongoing macroeconomic uncertainty. That guidance and the trend of sliding auto sales more broadly have led investors to push the stock price down by more than 50% since the Q4 report was issued.
Still, the overall picture favors electric-vehicle makers like NIO: EV sales in China rose 62% last year to 1.26 million, including plug-in hybrids. Further, the government in Beijing has set a target that 20% of all auto sales in the country should be electric vehicles by 2025.
The next few months could be rough for NIO, given the company's guidance and the recent subsidy cut, but it should return to sequential growth later in the year after it begins producing its ES6, a smaller SUV than the ES8, its only vehicle currently in production.
Like Uxin, NIO's future looks promising, given the secular growth expected in China's electric vehicle market. It's a competitive space, but the company's early results have been solid, and reviews are strong. With the stock trading below $5 for the first time since September's IPO, investors can get a piece of this potential growth star at a bargain price.