NIO Inc. (NYSE:NIO) is down more than 41% after reporting its second-quarter earnings on Sep. 24. The Chinese electric vehicle company fell well short of market expectations, with higher-than-expected cash burn despite sequential growth in delivery numbers.
With demand apparently fizzling out, NIO is rapidly running of cash. If it cannot raise external funding soon, it could be at risk of going under.
NIO managed to beat expectations on revenue, but only barely. On every other metric, the company had a disastrous quarter. In a research note following the earnings release, Bernstein analysts laid out the sheer scale of the failure:
Bernstein's was not alone in its harsh criticism. Morgan Stanley's post-earnings commentary was also scathing, concluding that NIO's cost-cutting efforts have come to naught:
Wolfe Research was also shocked by the scale of the losses. The analyst shop had been extremely bullish on the stock until this latest earnings flop. Wolfe saw no choice but to downgrade the name:
Running on empty
If the staggering losses were not bad enough, NIO also faces a looming liquidity crisis. According to Bernstein, NIO may only have weeks to live:
In other words, without a couple desperate financial maneuvers during the quarter, NIO would already be out of cash. Perhaps more concerning is the total silence on Beijing E-Town, an economic development agency operated by the Beijing municipal government. The absence of a reference to the E-Town financing deal was highlighted again in Wolfe Research's note:
Without a big external injection of cash, NIO will not be able to remain a going concern. As Morgan Stanley's note explained, this means that, despite the significant correction to the stock price and reduced market expectations already priced in, the risk of insolvency could mean more downside risk lies ahead:
Verdict
It appears NIO is in a lot of trouble. The company is rapidly depleting its financial resources and has lost the goodwill of investors. With the stock already crushed, any further financing would likely come with punishing dilution. Moreover, there is no certainty whether the company will be able to raise sufficient financing at all. At its current cash burn rate, it will likely need to raise several hundred million dollars to be able to reassert a degree of stability. But that will not be cheap.
Additionally, NIO's management has strained credulity. After delaying the publication of its earnings report, apparently in an effort to close its as-yet-unfinished agreement with E-Town, it abruptly canceled its analyst earnings call. Bernstein reflected on this turn of events with rueful humor:
While a call did eventually take place, it offered little more information regarding the company's future.
Weak volume, crushing losses and unsustainable cash burn add up to a very ugly picture for the young electric vehicle manufacturer. Electric vehicles may be the future of driving, but NIO's future as a going concern looks extremely shaky.
