Amid the COVID-19 pandemic, a sign of hope just emerged for NIO (NIO -0.11%) stock. Faced with mounting losses, the maker of electric vehicles (EVs) had struggled to gain traction in better conditions. Also, with its current funding nearly exhausted, the company needed a cash infusion quickly. Fortunately, NIO just secured 7 billion renminbi ($989 million) worth of backing from an investment group.
However, with massive financial losses set to continue and a harsh competitive landscape with which to contend, NIO stock may only see a limited benefit from this investment.
NIO's new investors
The latest investment involves several investors, many based in the Chinese city of Hefei. This comes only two months after the Feb. 25 announcement that NIO had entered into a collaboration framework agreement with the Hefei Municipal Government. The deal creates a new firm called NIO China, where the current NIO will place its core assets and business. With a more permanent agreement in place, NIO will move its headquarters to Hefei, expand operations, and strengthen its relationship with local partners in the area. Current NIO shareholders will own 75.9% of the new firm created with this agreement, with outside investors holding the remainder.
NIO needed a deal quickly. In its most recent quarter, the company reported a loss of over 2.813 billion renminbi ($397 million), or 2.73 renminbi ($0.39) per share. NIO reported holding about 1.056 billion renminbi ($150 million) in cash in the same quarterly report. In recent weeks, the company stayed afloat by selling $235 million in convertible notes.
NIO's financials troubles remain
The new agreement gives the company a much-needed lifeline. Consequently, the automotive stock surged by just over 8% in Wednesday trading following this announcement.
Nonetheless, investors need to ask how much this will actually help NIO and its stock. This is not the first time that a Chinese government entity has intervened on the company's behalf. Last May, a state-owned fund agreed to invest up to 10 billion renminbi ($1.411 billion) into the company as the Chinese government sought to reduce state subsidies for EVs.
However, that cash did not last, and this latest investment only buys the company a small amount of time. Even at the previous quarterly loss rate of 2.813 billion renminbi, the 7 billion renminbi will last less than three quarters. Hence, investors should assume that NIO will need yet another cash infusion soon.
Even without factoring competition from Tesla or the coronavirus, NIO is neither near the beginning nor the end of its financial struggles. The company lost 26.85 billion renminbi ($3.79) per share in 2018 and 10.63 renminbi ($1.50) per share in 2019. Also, analysts forecast that these losses will continue. They predict that NIO will lose $6.66 per share this year and $5.42 per share in 2021.
Revenue-related challenges also persist. How COVID-19 will affect the financial picture also remains a question. Delivery numbers fell off of a cliff in February before staging a partial recovery in March. NIO insists that the supply chain concerns surrounding coronavirus have passed. Still, even if deliveries return to pre-pandemic levels, the lower sales denied the company much-needed revenue.
Even worse for NIO, China announced that it will reduce subsidies on EVs by 10%. While some subsidies will remain in place until at least 2022, this constitutes yet another lost revenue source for the struggling company.
Competition remains intense
Moreover, the deal does not change the business conditions faced by NIO. China has seen intense competition in the EV space, including numerous foreign automakers who want to sell EVs in China. As of January, more than 400 China-based EV companies operated in the People's Republic.
Despite this drop in the stock price, some compare NIO to its U.S.-based counterpart, Tesla. Many have gone so far to call it the "Tesla of China." However, with Tesla now operating a Gigafactory in Shanghai, Tesla itself has become the Tesla of China. Worse for NIO, it leaves the company with yet another sizable direct competitor.
NIO manages to stand out amid its numerous competitors by virtue of the publicity it receives. It has also generally increased revenue and reduced losses. Additionally, the latest round of funding addresses the company's solvency concerns, at least temporarily. Nevertheless, given its financial challenges and intense levels of competition from both large and small automakers, investors are still unlikely to profit from holding NIO stock over the long term.