What happened
Shares of Nio (NIO +0.87%) slumped this week and were trading 17% lower through 11 a.m. ET Friday, according to data provided by S&P Global Market Intelligence. Despite a positive opening on the last trading day of the week, Nio stock has now lost more than 40% value since Aug. 1, thanks to this week's extended weakness.
So what
Earlier this week, Chinese electric vehicle (EV) maker Nio announced plans to raise at least $1 billion in debt in the form of convertible senior notes. Nio said it will offer $500 million of senior convertible notes due 2029 and another $500 million due 2030. The proposal includes a potential additional offering of $150 million, which effectively means Nio is looking to raise up to $1.15 billion in debt.
Nio said it'll mainly use the funds to pare a portion of its existing debt and strengthen its balance sheet. That doesn't sound too bad, but the idea of a loss-making start-up raising so much debt is enough to rattle investors.
NYSE: NIO
Key Data Points
What's spooked the markets even more, though, is the form of debt -- senior convertible notes are a type of convertible bond that can be converted into equity, as their name suggests. In other words, holders of the senior convertible notes can opt to exchange them for shares in Nio. If they do, it'll dilute the wealth of Nio's existing shareholders.
There was another interesting update from Nio this week. The EV maker launched its first smartphone with a starting price of around $890. Yes, you read that right.
Nio believes its smartphone, launched at its 2023 Innovation Day event, will give the company an edge over rivals since the Nio Phone is designed specifically for Nio owners to use with their cars. The Android-based high-end smartphone comes with more than 30 car-specific features, such as launching self-parking mode, unlocking the car, and adjusting the temperature of the air conditioner.
Now what
A car-specific phone is an innovative idea, but investors are far more concerned about Nio's EV sales and profitability right now than the launch of a smartphone. With Nio still making losses and burning cash rapidly, investors are jittery about debt.
Nio, however, foresees a strong second half of the year as it ramps up production and launches new car models. It expects to deliver 55,000 to 57,000 cars in the third quarter and sees its gross margin rebounding to double-digits in the quarter. For perspective, Nio delivered only 23,520 EVs in the second quarter and reported a gross margin of 1%. If Nio can deliver on its promises, the markets could soon forget all about the debt and send the languishing EV stock higher.
