The Rise of EVs: Nio Inc. (NIO) up 25% this week on cash injection

There are certainly tremendous rises in EV and the stock prices like Nio Inc. (NIO) in the industry are truly showing just that.

Electric car firms have been warming up at Road. Tesla (TSLA) is the most well-known challenge to the moon but this year it is not the only major winner. In Nikola (NKLA) and Nio (NIO) Bulls were running hot, too. Over the past two days of trading, NIO stock has soared more than 14 per cent and is quickly approaching its $7.90 52-week peak.

Nio, which is based in Shanghai , China, manufactures and sells smart EVs. Volatility has clung to its share price like plague since its IPO in September 2018. What started as a wide range riddled with whipsaw morphed into a nasty downtrend which turned NIO almost into a penny stock. Investors expressed legitimate concerns about the company’s dwindling cash pile in 2019. It burned through available money while desperately searching for more cash to keep alive the dream.

Fast forward to the present and we are in a much safer situation. There is no need to take an exhaustive look at all the structural changes as the price chart shows us what we need to think about.

The stock has risen more than six-fold to its current $7.72 since it bottomed at $1.19 last September. The market has clearly decided the fundamental problems with Nio’s business model are either resolved or much less serious than they were.

It doesn’t matter whether you think the increase is justified or not. When the tide turns lower, betting against the force is a fool’s errand. The audience shouted.

A look at Nio, Inc. (NIO)

  • Nio (NIO) reports deliveries grew 190.8% Y/Y in Q2 to 10,331 vehicles, exceeding quarterly guidance.
  • The company delivered 3,740 vehicles in June (+179.1% Y/Y), consisting of 2,476 ES6s and 1,264 ES8s.
  • Steven Feng, chief financial officer of NIO, added, “We are pleased to deliver solid results driven by our competitive products, superior services and expanding sales network. Our deliveries in the second quarter of 2020 exceeded the high end of our earlier projection, and we are confident that our goals on gross margin and operational efficiency will be achieved.”

The company reported on June 29 that it had earned RMB 4.8 billion (about $678 million) from strategic partners now holding 24.115 percent of a joint venture in which Nio contributed its assets.

The EV creator also expects to be getting more money. For example, it will spend 200 million RMB before Sept. 30. Nio is also expecting a further RMB 2 billion by March 31, 2021. Hence its strategic partners placed a total of 7 billion RMB for the JV stake.

Nio’s stock valuation

Unbelievably, Nio stock currently has a stock market value of $8bn at the closing price of $7.23 a share on June 29. But here’s an observation about valuation that investors might miss.

If you take the RMB 7 billion and divide it by 24.115 per cent, you get an estimated value of RMB 29 billion for the joint venture with Nio, called Nio Anhui. That amounts to $4.1bn.

It also implies Nio ‘s asset contribution valued at RMB 22 billion, or just $3.1 billion, to Nio Anhio. Yet Nio stock now has an eight billion dollar market value. This is almost twice the valuation implied by the strategic partners dealing with the joint venture.

It is not necessarily true in reality as Nio just raised another $428 million in equity through an ADR offering. In other words, the implicit value of Nio Anhui’s strategic alliance is $4.1bn but Nio ‘s pre-ADR bid is worth $7.57bn. Consequently Nio’s inferred contribution is just $3,467 billion. That is a long way from market value of $8 billion.

Or put it another way, any Nio stock is worth more than 50% less than its present value. And, the partnership ‘s interest and the additional cash make the business worth double what the strategic investors were able to pay Nio.

There is of course the third option. The strategic investors probably thought their $4 billion value was too weak. They understood, in other words, that they had a premium for the bargain.

Plans for the money

Nio reported a net loss of $239 million in Q1 2020 on $193.8 million in sales. At this pace Nio may last another four quarters or so, assuming this reflects the burn rate. This is because its liquidity consists of $988 million from the strategic partners and $428 million from the sale of ADR equity, or $1.42 billion.

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Jay Lorrence
Jay Lorrence

Investor of 12 years and Managing Editor of Money Midnight, a news outlet focused on highly profitable investment ideas and bold underground research.

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