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Why NIO Stock Is Trading Lower Today

By John Rosevear - Dec 14, 2020 at 10:28AM

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A secondary offering was oversubscribed, but it priced at a discount. Is that good or bad?

What happened

Shares of Chinese electric-vehicle maker NIO ( NIO 0.59% ) were trading lower on Monday, after the company said that a planned secondary stock offering had priced below Friday's closing price. 

As of 10:15 a.m. EST, NIO's American depositary shares were down about 4% from Friday's closing price. 

So what

NIO said on Monday morning that its planned secondary offering has priced at $39 per share. That's a discount of 7.1% from Friday's closing price of $41.98, suggesting that the banks underwriting the offering needed to offer clients a bit of a discount to move the shares.

That's not generally considered bullish. 

But on the other hand, NIO's offering was "oversubscribed," meaning that the underwriters opted to purchase additional shares above and beyond the initial planned amount. 

NIO had said last Friday that it planned to offer 60 million shares, and that its underwriters -- Morgan Stanley and China International Capital Corporation -- had the option to purchase up to 9 million additional shares. 

That was revised upward over the weekend. NIO is now selling 68 million shares (at $39), and the underwriters now have a 30-day option to purchase up to 10.2 million more.

That is generally considered bullish. So what does this all mean? 

A prototype NIO ET7, an upscale electric sedan.

NIO said that it will use the proceeds of this offering for future-product development. The company is expected to launch two new sedans in 2021. Image source: NIO.

Now what

For auto investors who are thinking of NIO as a longer-term investment, here's what it means: NIO is about to raise a whole bunch of money at a pretty good price. 

Sure, $39 is below where the stock was trading a week ago. But it's a lot higher than where it was trading a few months ago. The story of this offering is intact: NIO is taking advantage of the high valuation that has resulted from intense investor interest to raise additional funds to bolster its balance sheet.

That's still good news for the company, even if the price had to be discounted a bit to make it happen. And I think the fact that NIO was still trading above $40 as I write this suggests that most investors understand that. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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