Shares of Chinese electric vehicle (EV) company NIO (NIO -8.40%) are rallying after a terrible September showing.

After going public last year and raising $1 billion, the start-up has hemorrhaged nearly all of its cash and had just $503 million in cash and equivalents on the books at the end of June 2019. NIO reported a big rebound in deliveries for the third quarter, but that isn't the good news some investors think it is.

When more sales = more losses

NIO's deliveries in Q3 showed a big rebound -- 4,799 in total, up 35% from Q2 -- and the stock saw a double-digit rally as a result. The number included 4,196 of the new ES6 SUV model, as well as 603 of the larger and more expensive ES8.  

It's a good sign for NIO after ugly Q2 sales figures (see below). The ES6, which was available for purchase in China starting in June, holds the key to NIO's future, so the strong start to the car's first full quarter of sales is positive.

Total deliveries also handily exceeded management's guidance for 4,200 to 4,400 given during the last report.  


Total Deliveries


Gross Profit Margin

Operating Expenses

Q3 2018


$214.0 million


$392.2 million

Q4 2018


$499.7 million


$503.3 million

Q1 2019


$243.1 million


$357.4 million

Q2 2019


$219.7 million


$396.5 million

Q3 2019





Data source: NIO.

As with all manufacturers, NIO's costs fall the more units it makes. That's reflected in a better gross margin on sold vehicles. This was evident in the fourth quarter of 2018 when the EV company broke even on the manufacturing side. However, its operating expenses are also variable, and the company still ran at a steep loss in Q4 last year because of the much larger operations bill.  

A NIO ES6 SUV in red, pulled up to and reflected in a mirror.

The NIO ES6 electric SUV. Image source: NIO.

Still deep in the woods

And that's why NIO's third-quarter delivery figure could be bad news. More EV sales means better gross margins, but it also means higher operating costs -- and thus steeper losses. Management said it's looking to slash costs to become more efficient, but so far no dice. It's unlikely it has slimmed down enough in a mere few months to get the bottom line closer to zero during the third quarter. Thus, I fully expect another report mired in red ink.  

A recent cash infusion from key investor Tencent (TCEHY -0.92%) will help, but the reported $200,000 in new investment isn't going to last long. NIO's aspirations to be more than a car maker -- "a lifestyle company" that also sells energy-efficiency products for homes and operates retail spaces for ES8 and ES6 owners -- are looking like they were a little too ambitious. Perhaps sales will continue to accelerate and the Chinese economy will rebound, but the cash crunch is an immediate concern. 

The company needs several things to be viable going forward:

  • a bailout of some sort;
  • a renegotiation of manufacturing terms (remember, state-owned automaker JAC Motors is handling production and charging a fee on sales);
  • a rebound in the Chinese economy; and
  • its own factory churning out EVs.

It's quite the laundry list, and it's not clear how the above moving parts will pan out for U.S. stakeholders. This is one risky bet on the auto industry that most investors should probably avoid. Being a pioneer can help ignite change, but it can be devastatingly expensive for early investors.