After declining sharply between August and October, Nio (NYSE:NIO) stock has essentially traded sideways. Some are considering buying in hope a turnaround is taking shape. After all, earlier in November, Reuters reported that the company was laying off a tenth of its workforce. While layoffs are unfortunate, they sometimes mark the beginning of a turnaround.
Layoffs can enable troubled firms to rightsize their businesses, resulting in improved operating performance. However, I wouldn’t assume that will be the case here with Nio. In fact, instead of serving as a sort of a silver bullet for Nio’s problems, the layoff announcement may mark the beginning of the end for this onetime high-flier. Read on, as I explain below.
NIO Stock Is a Lose-Lose Situation
Many growth stocks have bounced back this year, thanks to a combination of cost reduction efforts and re-accelerating growth. Yet if you’re banking a similar outcome will arise with Nio think otherwise. For one, it is highly questionable that any resurgence in growth is just around the corner.
Sure, last month, Nio reported year-over-year sales growth of nearly 60%. However, while impressive on a year-over-year basis, on a month-over-month basis, deliveries growth was far less impressive (just 2.77%).
As InvestorPlace’s Thomas Niel argued a few weeks back, this weak sales growth comes as competitors have reported considerably stronger sequential sales growth. It’s possible that competition is getting the better of Nio, with little suggesting that this “also ran” will soon surge back towards the front of the pack.
Meanwhile, while growth keeps stalling, job cuts may not get meaningful results when it comes to Nio’s path to profitability.
Layoff-related cost savings may be more than countered by a sharp decrease in gross margins and an increase in overhead expenses in recent quarters, as seen in Nio’s most recently-released quarterly results. With growth slowing down while net losses remain high, Nio appears set to be stuck in a “lose-lose” situation.
The Beginning of the End
While NIO stock has declined considerably since the height of the 2020/2021 EV stock bubble, the potential for Nio to bounce back after China’s Covid shutdown, and continue on a course towards becoming a global name in EVs was enough to sustain a valuation in the $10 billion to $20 billion range, despite high reported operating losses.
However, as the Chinese EV market has clearly bounced back, but Nio is hitting a growth wall, this bull case is finally shattered. Falling behind in its home market, the company may have to resign to becoming just a small name in the space.
Nio’s execution issues also make it very doubtful the EV maker will find success in overseas markets, despite continued expansion efforts in Europe, and the company’s aim to enter the U.S. market by 2025. While there’s nothing wrong with merely becoming a mid-sized automaker, a severely-limited growth runway means a further re-rating to the downside of Nio’s valuation.
This is likely the case, even if the company makes progress improving gross margins/right-sizing overhead in order to become profitable. Worse yet, if high losses continue, expect a severe de-rating.
Bottom Line: Avoid This Slow-Motion Car Wreck
When it comes to downside risk with NIO, assume it to be as high as 100%. Yes, at this moment, the company is not experiencing severe financial distress. The company’s war chest remains sufficient to absorb current cash burn.
However, as InvestorPlace’s Will Ashworth pointed out this week, Nio may only have cash on hand to sustain itself for another year. With this, it’s not out of the question to say that the company could need to conduct a highly-dilutive capital raise to get its financial house back in order.
If that’s not bad enough, it’s far from set in stone that (given current market conditions) Nio could obtain billions in new financing.
Until evidence to the contrary emerges, consider it best to keep avoiding the slow-motion car wreck that is NIO stock.
NIO stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
