Nio’s Precarious Position: A Critical Analysis for Potential Investors

Will Ashworth

Sun, Nov 12, 2023, 6:31 PM 4 min read

A 10% Staffing Cut

Typically, Wall Street loves job cuts. CEO William Li said on Nov. 3 that it plans to cut 10% of its workforce as it faces some of the fiercest competition in the EV Market it has faced since its inception.

“‘The coming two years will witness the most intense competition during the transformation of the automotive industry in an environment full of uncertainty,’ Li told employees in a letter seen by CNBC,” CNBC reported.

The combination of a weak Chinese economy and lower prices by Tesla (NASDAQ:TSLA) has leveled intense pressure on the car company’s future. But, of course, it’s not the only Chinese EV manufacturer suffering.

Xpeng (NYSE:XPEV) is expected to lose money until at least 2025, maybe longer. It, too, has several hurdles to overcome.

Record Deliveries Don’t Tell the Full Story

Nio reported record deliveries for October on November 1. According to the company, it delivered 16,074 EVs, nearly 60% higher than a year ago and 2.8% higher than its deliveries in September. Year-to-date, it’s delivered more than 126,000, 33% higher than in 2022.

All of these delivery numbers seem good. What’s the concern for investors at this point?

I think the problem, as InvestorPlace’s Paul LaMonica pointed out in his Nov. 7 article about Nio, is that the company has lowered prices in China to compete with Tesla, ramping up losses and, in turn, hurting its cash position. At the end of December, Nio had $6.6 billion in cash on its balance sheet. It was $2.3 billion lower at the end of June and will likely be lower at the end of September.

So, it’s maybe got a year before the cash runs out, which means it’s got to beg, borrow, and steal to strengthen its balance sheet. That was much easier 24 months ago when interest rates were considerably lower.

To make matters worse, it appears ready to enter the American market in 2025, importing Chinese-made EVs into the country, and because they’re not made in America, they won’t qualify for the $7,500 tax credit.

Through the first six months of 2023, Nio’s operating losses are $1.54 billion and likely to get much higher by the end of the year. Simple math says the 2023 operating losses will be over $3 billion.

Nio’s got a lot of plans. Cutting 10% of the workforce isn’t going to stem the tide. It needs the price war to end in China and interest rates to fall sooner rather than later.

The Bottom Line

I like the look of Nio’s vehicles. I do. And I hope that it turns the corner and wiggles its way out of its current problem of selling more cars but losing more money.

One bright spot: Of the 36 analysts covering NIO stock, 25 rate it Overweight or an outright Buy, with a target price of $12.67, 70% higher than where it’s currently trading.

Nio reports any minute now. I’ll watch the cash burn to see how much worse its business has gotten in the third quarter. I’m doubtful it will be good news.

For me, BYD (OTCMKTS:BYDDY) remains the top EV pick from China.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.