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Is NIO's $2 Billion Secondary Stock Offering Really Bearish?

By John Rosevear – Sep 8, 2021 at 11:14AM

Key Points

  • NIO, like other automakers, is struggling due to a global shortage of semiconductors.
  • Last week, it cut its deliveries guidance because of chip-related concerns.
  • The company may be seeking to bolster its cash reserves.

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The electric vehicle maker's stock price fell sharply after the announcement.

Shares of Chinese electric-vehicle maker NIO (NIO -2.51%) opened lower on Wednesday after the company said that it will sell up to $2 billion in new stock in an at-the-market secondary offering.

As of 11:06 a.m. EDT, NIO's American depositary shares were down by about 6% from Tuesday's closing price. Here's a look at what NIO said, and what it might mean for the company and its shareholders.

What NIO said about its $2 billion stock offering

NIO has filed the necessary paperwork for the stock sale, and its new shares will be offered through several big investment banks, including Credit Suisse, Goldman Sachs, Morgan Stanley, and the Hong Kong branch of China International Capital. Management said the company will use the net proceeds "to further strengthen its balance sheet, as well as for general corporate purposes."

A blue NIO ES8, an upscale electric SUV.

NIO, like other automakers, has had to reduce production in 2021 amid a global semiconductor shortage. Image source: NIO.

What's an at-the-market offering?

In at-the-market stock offerings, companies sell shares to buyers at the current market price at the moment of sale. This is different from a typical stock offering, in which investment banks agree beforehand to purchase the shares at a set price. 

In this case, it may mean that NIO plans to sell batches of shares from time to time, without giving further notice to investors.

Why is NIO raising money now?

The automaker isn't in urgent need of cash -- it had about $7.5 billion in cash and equivalents on the books as of June 30, more than enough to cover its near-term needs. But it's possible that NIO's senior executives see a storm on the horizon and want to bolster the company's balance sheet while the stock price is still strong. 

Like many other automakers, NIO has had to cut its production in 2021 due to a global shortage of semiconductors. Last week, it cut its guidance for third-quarter deliveries after reporting that it delivered just 5,880 vehicles in August. 

It's possible that NIO's senior team thinks that the chip shortage is likely to last beyond the end of the year. If so, boosting the company's cash reserves now is a prudent move.

So why did NIO's stock open lower?

I think there are a couple of factors at work. First, any new offering of stock is dilutive: As the number of shares outstanding increases, each share represents a smaller slice of the company. 

More broadly, NIO's choice to do an at-the-market offering raises a question: Were the banks unwilling to commit to buying the shares beforehand for some reason?

I don't have an answer to that question, and given the chip shortage, I genuinely think that it's prudent (and thus bullish, or at least not bearish) for NIO to bolster its balance sheet right now.

But the question is out there, and it's likely why the stock moved lower on the news. 

What's next for NIO

As I mentioned above, NIO cut its third-quarter deliveries guidance last week. It now expects to deliver between 22,500 and 23,500 vehicles in the quarter, down from its earlier forecast of between 23,000 and 25,000 vehicles. 

Automotive sector investors holding NIO's shares will hope that the company is able to hit that revised range, and that it will have good news about chip supplies when it reports its third-quarter results in November. 

John Rosevear has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NIO Inc. The Motley Fool has a disclosure policy.

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