Aggressive investors who bought Nio (NYSE:NIO) stock in early October at its 52-week low were probably jumping for joy when the Chinese maker of electric vehicles announced higher-than-expected Q3 sales on Oct. 8. Nio stock price jumped by more than 11% on the news.
Nio’s management had previously expected to deliver between 4,200 and 4,400 vehicles in the third quarter. It delivered 4,799 in the quarter, 35% higher than in Q3 and 47% above its vehicle deliveries in Q3 of 2018.
It’s important to note that NIO hadn’t begun to produce or deliver the ES6, the company’s five-seat SUV, during last year’s Q3. Deliveries of the ES6 only started in June 2019.
For Q3, NIO reported 4,196 deliveries of ES6 vehicles and 603 deliveries of the ES8, its seven-seat vehicle.
The good news is that the ES6 has been relatively well-received by Chinese consumers. The bad news is that doesn’t mean Nio stock has become a screaming buy. Here are a couple of reasons why that’s the case.
What Happened to the ES8?
Nio’s ES8 deliveries tumbled 82% year-over-year and 81% quarter-over-quarter. That’s terrible news for the long-term owners of Nio stock because it means sales of the higher-priced ES8 are already tumbling a little over a year since NIO launched it.
As a result of the decline, NIO is expected to cut its workforce by 21% in Q3 to 7,800. With Chinese subsidies for electric vehicles falling (subsidies for the ES8 sank from $9,500 in 2018 to $1,600 in June), it’s unlikely that deliveries of the vehicle are going to jump anytime soon.
“The China subsidy cut has been well understood by investors, so all China EV producers are looking at a weak 2H19,” Roth Capital analyst Craig Irwin said in September.
In addition to the subsidy cut, the recall of almost 5,000 ES8s in June after reports of battery fires on the vehicles likely contributed to the huge drop in ES8 deliveries.
That wouldn’t be a problem if monthly deliveries of the ES6 had kept increasing, but that wasn’t the case. NIO delivered 1,726 of the vehicles in September, 1,797 in August and 673 in July, suggesting that deliveries of the ES6 have topped out around 1,750 vehicles per month.
Since the ES6 costs approximately 11% less than the ES8, the company’s overall revenues are also likely not increasing.
The Second Piece of Bad News for Nio Stock
InvestorPlace contributor Mark Hake recently discussed the fact that NIO is functionally insolvent, with just $503 million of cash at the end of Q2 and burning about $500 million per quarter.
The only thing that’s going to save Nio from running out of cash is a financial lifeline from its founder and Tencent (OTCMKTS:TCEHY), the company’s largest outside shareholder. It’s also possible that the Chinese government could step in to save NIO from probable death.
As Bloomberg reported in September, “it took Tesla (NATSLA) about 15 years to rack up $5 billion in losses. Nio, the company known as China’s Tesla, did it in four.”
In June, I suggested that, given Nio’s negative gross margins — it loses money on every car it sells — and the fact that its Altman Z-Score bankruptcy predictor is off-the-charts bad, investors should stay away from Nio stock.
Since then, I’ve softened my tone a little, suggesting that aggressive investors might consider NIO below $3.50.
However, the trajectory that Nio is on suggests that it’s going to lose even more money in Q3.
I’m confident that aggressive investors ought to be able to find a better high-risk play than Nio. I wouldn’t buy Nio stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
