Nio (NIO 8.72%) was one of the market's hottest electric vehicle (EV) stocks. The Chinese EV maker went public at $6.26 per American depositary share (ADS) five years ago and closed at its all-time high of $62.84 on Feb. 9, 2021. But today, it trades at about $8.
Nio initially impressed investors by more than doubling its annual deliveries in 2020 and 2021. But in 2022, its deliveries only rose 34% as it grappled with intermittent COVID-19 lockdowns, supply chain constraints, extreme weather conditions, and intense competition. In the first half of 2023, its deliveries inched up just 7% year over year.
Image source: Nio.
As Nio delivered fewer vehicles, the pricing war across China's EV market crushed its vehicle margins. The ongoing expansion of its battery-swapping network also caused its operating losses to more than double year over year in the first half of 2023.
That slowdown, along with rising interest rates and the delisting threats directed at U.S.-listed Chinese stocks, crushed Nio's shares. However, its stock also looks cheap at less than 2 times this year's sales. Let's review two recent developments for Nio -- one is a green flag and one is a red flag -- to see where its stock might be headed.
The green flag: Nio is not raising another $3 billion
Nio ended the second quarter of 2023 with $4.3 billion in cash, cash equivalents, restricted cash, short-term investments, and long-term time deposits (similar to a CD). But it was also shouldering $9.5 billion in total liabilities, giving it a high debt-to-equity ratio of 4.7, and analysts expect it to post a net loss of $2.6 billion for the full year.
That's why many investors weren't too thrilled by Nio's recent decision to raise another $1 billion through a convertible notes offering. However, several reports suggested Nio could follow up that offering by raising an additional $3 billion from outside investors, implying its leverage could skyrocket as its growth cooled off and its margins shrank.
But in a statement, Nio countered those rumors and said it "currently has no reportable capital raising activity" other than its recent convertible notes offering. That might not be considered a major positive development for Nio, but it's still a green flag that implies it isn't as starved for cash as some of the bears might believe.
The red flag: The development of a first-party smartphone
Nio is already losing money on each of its EVs sold, so it wouldn't make much sense for it to expand into another saturated market filled with unprofitable companies. Yet that's exactly what it did when it unexpectedly announced the development of a new high-end smartphone during an investor event in Shanghai on Sept. 21.
The Android-powered NIO Phone will cost $900-$1,000 and be equipped with a dedicated car-control button featuring over 30 car commands. It can also be seamlessly integrated into the car's dashboard through its NIOLink feature.
Nio believes that half of its current EV customers will likely switch to a NIO Phone the next time they upgrade their smartphones. That's a bold claim considering that Apple, Oppo, Vivo, Honor, and Xiaomi still controlled 81% of the Chinese smartphone market in the second quarter of 2023, according to Counterpoint Research. It might have made more sense for Nio to simply expand the capabilities of its iOS and Android apps instead of rolling out a first-party phone.
The bulls might think launching a high-end smartphone is a daring move, but I think it's a bright red flag that suggests the company's willing to sacrifice its cash and margins to chase half-baked ideas.
Investors ought to avoid Nio stock
Nio is still in better shape than many other smaller EV makers, but investors ought to steer clear until it stabilizes its deliveries, margins, and net losses. Investors might have breathed a brief sigh of relief when it said it didn't need to raise another $3 billion, but its development of a new smartphone suggests it's still prioritizing all of the wrong issues.
