Even with This Dip, There’s No Good Reason to Buy Nio Stock

TARIFFS LATEST

James Brumley

Thu, Aug 29, 2019, 4:40 AM

A little over three months ago I offered some comfort to early Nio (NYSE:NIO) investors who had ridden out the steep post-IPO selloff. It wasn’t a recommendation to buy into Nio stock, or even a suggestion that the Nio stock price would inevitably improve in the foreseeable future. Rather, it was a simple reminder that nothing about the sea-sickening volatility thus far was unusual or surprising.

Even with This Dip, There's No Good Reason to Buy Nio Stock

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As far as assurances go though, what’s happened in the meantime is anything but comforting.

It’s not devastating to be clear. The young electric car company can dig its way out its hole. But, Nio has dug itself deeper into that hole at a point where it really didn’t need any more obstacles to overcome.

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Nio Facing a Demand Headwind

It’s easy to blame the tariff war for Nio’s woes, and if we’re being intellectually honest, that is a key part of the organization’s woes. July’s consumer spending growth in China fell to a pace of 8.6%, down from June’s 9.8%. A surge in July automobile sales, driven by steep discounts, inflated the number.

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The figure is still robust to be sure, but it’s a significant slowdown nonetheless that many weren’t expecting. It’s also part of what appears to be a developing trend.

On the flip side, it’s likely that Nio was going to have to lay off the 7500 employees it announced it would be cutting loose earlier this month regardless of China’s economic status. As early as March Nio acknowledged the demand for is ES8 had been unexpectedly weak, so much so that it scrapped plans to build a new manufacturing plant in Shanghai. The company and investors arguably saw that headwind well before it made the announcement though.

The curious aspect of the story: Tesla (NASDAQ:TSLA) isn’t feeling the same headwind. Through June of this year, its sales in China grew 40% year-over-year.

Whatever the case, Nio’s decision looks troubling, for investors as well as would-be buyers that don’t want a product made by a company that may or may not be around to offer service in the future.

A spate of battery fires this year and an eventual recall didn’t help Nio’s image either. Nearly 5000 ES8 vehicles required an outright replacement of their battery packs, the lifeblood of any EV.

A Bleak Present for Nio Stock

Company founders step down from leadership roles all the time. Broadly speaking though, they don’t do it at a point when that company’s leading visionaries need to stick around and put the organization on solid footing.

That’s what makes co-founder Jack Cheng’s retirement just five years after helping get Nio off the ground more than a bit startling.

Cheng is neither CEO nor president, two key positions that would understandably be offered to outsiders given Nio’s slow start in an environment that’s not been frothy for EVs, but certainly not disastrous either. Rather, Cheng’s official position is “Executive Vice President,” an important but not necessarily integral position that would allow him to see the development of Nio through to the end. The announcement cited age as a factor in the decision; he’s 61 years old.

The odd part about the age-based retirement? He’s not exactly retiring. Though his level of involvement in the organization is not yet entirely clear, Cheng will be working with a company called XPT, which makes components for Nio’s electric automobiles.

There are multiple interpretations of what could be considered a downward-sloped lateral move. One of them is, of course, is that Nio is a proverbial sinking ship.

To that end, two other key personnel exits (software head Li Zhang and U.K.’s managing director Angelika Sodian) revealed in July underscore the notion Nio’s struggle is more than just a typical sluggish start.

Again, if nothing else, it just looks bad, and gives doubters something to latch onto.

Looking Ahead for Nio Stock

I stand by my comments from May. None of this is terribly surprising or unusual, even if it is upsetting. Tesla went through it, as did Twitter (NYSE:TWTR). Uber (NYSE:UBER) is going through it too. Many companies and executives aren’t actually ready for post-IPO life. They go public anyway. Welcome to the game.

I also stand by my other comment made in May though. That is, Nio will survive, and eventually thrive. It may be ugly getting to that point, but electric vehicles are the inevitable future. Nio, despite all of its problems, is a respectable brand.

I certainly wouldn’t be in any hurry to scoop up Nio stock though.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.