NIO Stock Is Stuck in EV No Man’s Land

Stocks to sell

The electric car market in the United States is highly competitive. But it might be even more fierce in China… and that’s bad news for Shanghai-based EV maker Nio (NYSE:NIO).

Nio, which makes the ET5 electric sedan and EC7 SUV, has a LOT of rivals that it’s fighting for market share. There’s Tesla (NASDAQ:TSLA) of course. But there are also many homegrown players in China, including Li Auto (NASDAQ:LI), XPeng (NYSE:XPEV) and BYD (OTCMKTS:BYDDY). BYD, by the way, is backed by Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B).

Fierce Competition Forces Layoffs, Cash Raises

All of this competition has put pressure on Nio, which is now planning to lay off about 10% of its workforce in order to reduce costs. The company said in June that it would be lowering prices for its vehicles as well, a move that came following similar price cuts by Tesla and other automakers. Nio also lags many of its rivals in the hybrid market, vehicles that have both an electric motor and internal gas combustion engine.

The good news for Nio, and many of its domestic challengers, is that they all recently reported solid growth in deliveries. Nio said deliveries surged nearly 60% in October. So the demand for EVs is there. The problem though is that profitability is nowhere in sight.

Nio lost $835.1 million in the second quarter, more than double it lost a year ago and nearly 30% more than what Nio lost in the first quarter. Analysts aren’t predicting a turnaround anytime soon either. The company is likely to report another big loss when it reveals its third quarter numbers later this month.

Nio is also bleeding cash. It said it had $4.3 billion on its balance sheet at the end of June. That’s down from $5.5 billion at the end of March and $6.6 billion at year-end 2022. That’s not good. Nio isn’t yet at the point where investors must worry that it will soon run out of cash. But if the company keeps burning money at this rate, there could be serious liquidity concerns in 2024 or 2025.

Nio raised $1 billion in September from the sale of convertible notes, but the company was forced to deny that it was planning to seek even more money from investors following rumors of another capital raise.

Still, the company is aggressively planning expansion despite worries about capital. Nio said earlier this month that it intends to enter the highly competitive U.S. market by 2025, but without the benefit of tax incentives that American auto companies and other foreign firms who manufacture vehicles and batteries locally receive from the government. Nio intends to build cars for the American market in China and export them to the U.S., which means it won’t qualify for any tax breaks.

The Bottom Line on NIO Stock

Investors clearly are nervous. Nio shares have tumbled about 45% in just the past three months. Nio’s stock is now down 15% for the year. XPeng and Li Auto, meanwhile, have skyrocketed in 2023. Shares of XPeng are up more than 75% while Li Auto’s stock has nearly doubled.

As long as Nio remains in a bitter price war in China, the stock is unlikely to make a comeback anytime soon. It doesn’t help that losses could intensify if the company follows through on its promise to expand in the U.S. as well. So, Nio’s stock looks like one that smart investors would be best to avoid.

As of this writing, Paul R. La Monica did not hold (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.

Paul R. La Monica is a veteran financial journalist with nearly 30 years experience (including more than 20 at CNN) covering the stock market and other asset classes, the economy and other corporate and business news.

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