With all of the attention today on Tesla’s (NASDAQ:TSLA) soaring market cap breaking the $100 billion barrier, I thought I’d take a look at its Chinese counterpart NIO (NYSE:NIO) and its perennially volatile share price.
As Tesla competitors go, NIO is not cut from the same cloth as the rest. While many of Musk & Co’s sparring partners are long-established car manufacturers, such as Ford (NYSE:F) and General Motors (NYSE:GM), pointing their almost infinite resources towards producing electric vehicles as the market demands, NIO was only founded in 2014 in Shanghai with the specific purpose of producing electric vehicles for the Chinese and international markets.
Much like Tesla, it’s sole focus is the EV market, which has piqued many investors’ interest. Again much like Tesla, this interest is based more on potential than financials. Let’s look at the most recent fluctuations.
NIO’s Stock in 2020
- January 7th, one week into 2020, the stock fell 13% from the start of the year
- January 14th, two weeks into 2020, the stock increased 16% from the previous week
- January 21st, three weeks into 2020, the stock increased 38% from the previous week
- January 23rd (today), the stock fell 7% at the end of trading yesterday, and is likely to open down a further 4% in pre-market trading at the time of writing.
These are the fluctuations of a penny stock, not a $5 billion car manufacturer. To further prove my point, NIO stock’s 52-week high was $10.64 and its 52 week low was $1.19, a descent of almost 90%!
Why is NIO’s Share Price So Volatile?
The crux of the matter is that the company desperately needs cash. In NIO’s Q4 earnings report (which sent the stock soaring over 50% in one day!), they reported that “the Company’s cash balance is not adequate to provide the required working capital and liquidity for continuous operation in the next 12 months.” Yes, the same report that included a statement saying the company didn’t have enough cash to last a year caused the stock price to increase by 50%.
I think NIO’s volatility is a microcosm of the current state of Wall Street. Investors are foregoing pragmatism in favor of sheer, unbridled optimism. Just look at Beyond Meat’s (NASDAQ:BYND) start to the year. We see this in action every day as the market continuously hits record highs while corporate profits level off. Valuations are pricing in this potential as if it were solid figures. The practice has many people asking: when is the next recession?
NIO has an amazing upside. In a clearly future-relevant industry, they look like they could provide very real competition to Tesla, who currently has the electric vehicle market cornered. However, there is also a very real chance that NIO could go bankrupt. They are currently operating well beyond their means, and need cash by yesterday to maintain their operations and stay afloat.
Seeing the potential of a business is the only way to grab yourself a ten-bagger (that and luck!), but an over-reliance on potential alone is a quick way to lose the shirt off your back. Which category NIO falls into will be an interesting watch. I do hope its cars have a good suspension because it’s going to be a bumpy ride to get there.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Tesla. Read our full disclosure policy here.
Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.