Nio (NYSE:NIO) stock climbed more than 11% after the “Tesla (NASDAQ:TSLA) of China” reported strong third-quarter earnings on Oct. 8. Investors were especially pleased to learn that the company’s vehicle delivery increased by 35% from the second quarter.
This news came at just the right time for Nio stock, since the company has been struggling for most of this year. The company’s second-quarter earnings were a big disappointment, as was the news that the company laid off 20% of its workforce.
While it’s encouraging to see that Nio finished quarter three on a high note, this doesn’t discount the very real headwinds the company faces. And even after the jump in the company’s shares, Nio’s stock price is still down 81% from a year earlier.
Here are three things you should know before investing in Nio stock.
Nio’s Sales Have Been Hit or Miss
In recent months Nio, and the Nio stock price, has struggled due to declining electric vehicle sales in China. The company’s sales first started to drop in July, after the Chinese government reduced subsidies for electric vehicles in June. The U.S. experienced declining demand for electric cars as well.
According to Bloomberg, the demand for electric vehicles grew 35% during the first half of 2019. Increasingly, consumers are looking for more fuel-efficient vehicles. China is at an advantage since it’s the largest producer of electric cars.
However, electric cars are priced higher than other vehicles. It remains to be seen whether the demand for Nio’s vehicles could drop further during an economic downturn.
The Company Has Real Financial Problems
In the coming years, it seems likely that more consumers will begin to embrace electric vehicles. The question is, will NIO still be around when that happens, or will the company have spent through its cash reserves first?
The company is burning through cash at an astonishing rate. During the second quarter, the company spent $620 million in preparation for the launch of the ES6.
Nio does have a deal with its largest investor, Tencent Holdings, for an investment of $200 million. But at the rate the company’s spending money, $200 million probably won’t go very far.
NIO Is Nowhere Near Profitability
Finally, the company’s third-quarter earnings are a step in the right direction, but Nio is still nowhere near profitability. Most analysts agree that it’s better to hold the stock at this point until it’s clear what will happen with the company’s financials.
Even analysts that were previously bullish on Nio stock are starting to become hesitant about the company’s future. A Goldman Sachs analyst recently downgraded the stock, citing problems with sales and possible share dilution.
The market for electric vehicles is going to be big and Nio still has potential. But the company is going to have to get ahold of its spending and sales before it’s considered a good investment.
As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.