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1 More Reason To Avoid Nio

Two months ago I showed you several reasons why you should Avoid Nio Stock.

Today I tell you 1 More Reason To Avoid Nio…  Even though its one of the most popular stocks on trading app RobinHood.

You can read the full article above.

But if you don’t want to; here’s a quick recap of why I said you should avoid Nio.

Introducing Nio (NIO)

Is Nio Profitable?

Let’s do a quick rundown of Nio’s profitability and cash flow.  Because profits and cash flow drive the long-term value and pricing of a stock over time.

I measure this in part by looking at two important metrics.

Operating profits and free cash flow/sales (FCF/Sales).

On an operating profit basis Nio’s produced an average operating profit margin of negative 167.7% per year on average every year over the last 2 years.

Eww…

Normally I like to go back a decade and look at these numbers, or at minimum 5 years.  But I can’t do either in Nio’s case because of its IPO in 2018.

I look for any company to produce above 10% margins on a consistent basis to consider as an investment.

And Nio’s got negative margins in this case of more than 100%.  Meaning its spending 167.7% per year on average more than its earning in operating profits.

Not good.

This falls well below my threshold of what I look for to consider for investment.

What about FCF/Sales?

Over the last 2 years Nio’s average a negative 173.3% per year.

Again, this is horrific and means the company is spending 173.3% more than what its earning in free cash flow.

How are both numbers so negative?  And how is it possible for Nio to do this and stay in business.

Because it keeps issuing shares and debt.

It’s using these to stay in business, keep developing and selling its products, and to keep building out its infrastructure.

High growth companies do this to continue growing.

Uber

Airbnb

And Tesla are just a few names of businesses in the high-tech arena who followed this same model to becoming the behemoths they are today.

But neither Tesla nor Uber have ever been this unprofitable on those metrics.  At least not while they’ve been public companies.

The worst operating profits Uber’s had as a public company is negative 78.6% in 2016. And in that same year it also had its worst year in terms of the FCF/Sales ratio at negative 118.3%.

Tesla’s worst numbers were a decade ago in 2010 as it now achieving profitability.

And as of this writing Airbnb still isn’t public so it’s impossible to say what their numbers are.

Both operating profit and free cash flow are important because they help show you the profitability of the company.

The more profitable a company is the higher its value goes over time.  And the more money it can spend on innovations and serving customers.

Instead, Nio is diluting shareholders and issuing ever more debt just to stay in business.  

The amount of unprofitability Nio’s has is enormous and unsustainable.

And it also makes it near impossible to properly value the company.

But one things for certain, with its huge run up this year of 255.4% it’s now worth $15.3 billion as of this writing on July 8th.

Nio is not worth $15.3 billion anywhere else than in the crazy speculative market we’re living in today.

If you buy Nio shares today you’re buying a company that is spending almost 2X what its bringing in, in profits and cash flow.

This is more gambling than investing.

And the people buying Nio shares today are doing just that.  Gambling.

I recommend you avoid buying Nio shares today because they are far closer to imploding than profitability.

***

This thesis to continue avoiding Nio was proved out even more on August 28th, 2020 when Nio announced its going to offer 75 million new shares for sale.

The issuance of 75 million new shares will help the company raise an added $1.35 billion to continue funding operation while its enormously unprofitable.

Share issuances are the only way this company is staying solvent… And it’s not sustainable forever.

And even though this is a large amount of money it won’t last long because Nio’s burned through $1.53 billion in free cash flow in the last 12 months.

This $1.35 billion won’t even last a full year at its current rate before Nio has to dilute shareholders again to raise even more cash.

From 2016 to today in September 2020 its gone from 848 million shares outstanding to 1,100 million shares outstanding after this share issuance.

This is share dilution of 29.7% in 4 years… With more likely to come soon due to its incredible amount of negative profits and cash flows.

Think of this like a pizza.

When Nio issues more shares, the same size of pizza stays… But more people are around to eat it so the piece of pizza you have gets smaller and smaller the more it dilutes shares.

If a company keeps doing this over long periods like Nio has, the same size of the pizza remains but eventually you’ll get to eat little to no pizza.

Meaning you’ll not only less and less of the company… But you’ll also own less and less of the profits and cash flows the company produces.

Which makes the value of your shares less and less over time… Which eventually lowers the price of your shares as well.

In Nio’s case this means since 2016 its shares are worth 29.7% less on a per share basis in 4 years.

And yet the share price of its stock is up since I last told you about Nio on July 14th, 2020.

From $14.09 per share to $17.98 per share as of this writing.  Or an increase of 27.6% in 2 months.

In other words, the economics of Nio have continued to be horrific, and the company is diluting shareholders even more.  Yet the price of the stock continues to rise.

It makes no sense…  Until you realize that people are speculating in the stock even more now than they were 2 months ago.

Continue avoiding Nio stock and the mass speculation and share dilution going on right now. Because this will not end well for Nio shareholders.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.


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