NIO (NYSE: NIO) stock has faced significant selling pressure over the past month. Shares in the electric vehicle (EV) manufacturer have fallen by around 26% over the past four weeks. The stock has dipped approximately 30% over the past 12 months.
There are a couple of reasons why the market has turned its back on NIO this year. Even though the company has increased its output, and the demand for its vehicles is rising, concerns about the group’s ownership structure and competition have weighed on investor sentiment.
But is this an opportunity for savvy long-term investors like myself, to snap up a bargain the rest of the market is avoiding?
NIO stock opportunity?
If I strip out all of the concerns surrounding the business, it looks as if the EV producer is performing ahead of expectations.
Earlier this year, the group cut output projections due to supply chain constraints. However, it recently reported better than expected delivery numbers for the third quarter.
Although the company’s output is still a fraction of the size of larger competitors such as Tesla (around 25k to Tesla’s 250k per quarter), it is trying to scale up its output rapidly.
Management is pushing forward with new factories, which should enable the group to hike output and meet the rising demand for EVs in China and around the world.
Unfortunately, the increasing output will require money — a lot of it. To fund the capital spending needed, throughout November, the company issued $2bn of shares through what is known as an at-the-market offering. This structure drip-feeds new shares into the market as a way to reduce the negative impact on the stock.
Even though using an at-the-market offering can reduce the impact of a share issue on a stock price, it still dilutes existing investors. This means each investor has a smaller claim on the business than they did before the issue began.
NIO’s offering is now complete, and the company has the funding required to pursue its growth plans.
Risks ahead
I think this recent development highlights the risks of investing in NIO stock today. The company is still in its early stages of development and it is losing money. By comparison to its peer, Tesla, these fundamentals are not particularly attractive. Tesla’s output is 10-times higher, and the corporation is profitable.
Therefore, despite NIO’s potential, I would not buy the stock for my portfolio today. I think some of the recent declines in the company’s share price reflect the new shares in issue, and management may have to repeat this action to raise more money in the future.
With some big growth plans in the pipeline and no profits, NIO will need additional funding at some point. It is likely the group will call on investors again to provide this additional capital.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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