Don’t Let NIO’s Dilution Become A Bearish Delusion

Furthermore, NIO is about to launch the ET5, a compact sedan, and the ET7, a mid-sized family sedan.

NIO also has its own AI-powered self-driving software called NIO Pilot that uses multiple cameras, sensors and radars. If you’re curious, NIO Pilot uses Mobileye’s vision chips — the same company that makes Tesla’s Autodrive hardware.

Sounds an awful lot like Tesla, right? But NIO has one thing that Tesla doesn’t: the ability to swap batteries on the go. Sure, NIO is building out its own network of fast-charging stations — just like Tesla — but the company has also constructed 18 battery-swap stations across China.

Remember, one of the biggest drawbacks to EVs is the long battery charge time — which can take as little as half an hour for minor charging and last up to several hours to reach a “full tank.”

In its genius, however, NIO designed its EVs with the ability to hot-swap batteries in as little as three minutes. That’s faster than filling up your gas tank. And if that wasn’t enough, original NIO owners can swap those batteries for free!

Imagine if all EVs could hot-swap batteries in about three minutes. Can you say: “Goodbye range anxiety?” Sure you can.

But you’re not here to listen to me extol the virtues of NIO EVs or its business model — which, by the way, saw deliveries jump more than fivefold this year!

You’re here for investment advice. So, let’s get to why NIO sold off this past week.

Dilution Junction, What’s Your Function?

So, the big headline reason for NIO’s decline last week was share dilution. In layman’s terms, NIO added more stock to the market, which waters down the stock’s price.

After all, a stock’s price is supposed to be a function of the number of outstanding shares versus the company’s forward-looking earnings.

Put even simpler, if a company is worth $10 total and it has 10 shares, each of those shares should be worth $1.

But if that company doubles the number of shares available, those shares are now worth $0.50. Share dilution is something like that.

NIO announced Wednesday that it plans to sell $2 billion in new American depository shares — aka American “stock.” This will eventually result in a 3% increase in the number of NIO shares available for trading on Wall Street.

I say “eventually” because NIO isn’t dropping all that stock like it’s hot. No, the new shares will be offered through several banks, including Credit Suisse, Morgan Stanley, Goldman Sachs and Nomura Securities. Those banks will have discretion as to when to sell new NIO stock.

Now, this isn’t the first time an EV maker offered stock to raise capital. Tesla has done multiple offerings and stock splits to raise cash and make its stock price more palatable. Heck, this isn’t even the first time NIO has issued more stock.

Back in December 2020, NIO sold 60 million new shares, prompting a similar short-term sell-off. If you remember way back then, you might also remember that NIO stock went on to hit a fresh all-time high less than a month later.

(By the way … with EV growth set to surge 1,150% by 2030, there’s still a lot of money on the table. For the absolute best way to play EV stocks, click here now.)

Stock Offerings: More Than Meets The Eye

Going back to our math example above, you might think it’s reasonable for NIO stock to fall about 3% to account for the 3% increase in shares available. But NIO gave back more than double that. Is this just an overreaction on Wall Street’s part?

Well, yes and no.

You see, NIO’s sell-off is partly due to the $2 billion in new stock. But the real issue that’s weighing on Wall Street’s mind is: “Why now?”

Timing is everything on Wall Street, after all, and NIO just said in its last quarterly financial report that it had more than $7.5 billion in cash and equivalents on hand. So, why does it all of a sudden need more capital?

NIO’s official stance is that it will use the cash “to further strengthen its balance sheet, as well as for general corporate purposes.” But Wall Street analysts speculate that NIO is actually raising cash to deal with the semiconductor shortage.

Remember the semiconductor shortage? It’s been a hot minute since we’ve talked about that one. NIO already lowered third-quarter deliveries guidance due to the global chip shortage, and analysts believe that the new $2 billion offering is to prepare the company for more chip-induced production woes.

In other words, analysts believe that NIO is preparing for the worst — and that the chip shortage will last well into next year. (It was supposed to be over by the end of 2021.)

This is a dual-edged sword for NIO. On one hand, raising capital now in anticipation of more chip production woes is a very smart business move. I mean, remember Aesop’s Fable about the grasshopper and the ants? It’s like that, with NIO starring as the ants.

Unfortunately for NIO, Wall Street interprets this type of prepping as weakness. And Wall Street’s not completely wrong. If it’s true that NIO is raising capital to prepare for an extended chip shortage, it means lower delivery numbers, sales and revenue growth for several more months.

That said, assuming this is the reason NIO is raising capital, it shows that NIO has excellent leadership that’s willing to do what’s necessary to survive — and I don’t mean pushing trucks downhill for promo videos.

Feed Your Head

I’ve waffled on NIO for a while, Great Ones. For more than a year, I’ve been waiting for the right time to strike … the right price to get in.

But then I remembered what the dormouse … erm … Great One Dick K. said last November:

Dick, I’m finally jumping in the water.

Clearly, we’re not as lucky with our entry price, but after last week’s sell-off, NIO is trading just shy of half its all-time high. Furthermore, the shares are nearing oversold levels.

What this means is that NIO stock is now relatively cheap compared to its price range over the past year — and it’s a perfect time to buy!

Here are your bulleted reasons to buy now:

• NIO stock is cheap due to chip shortage fears.
• NIO has “home field” advantage over Tesla in China.
• China is souring on Tesla, and state media isn’t helping.
• NIO is expanding into Europe.
• NIO’s deliveries increased fivefold in the past year.

Now, it may take some time for Wall Street and the global economy to digest the whole chip shortage thing. But once the shortage is over, NIO will be ready to hit the ground running … flush with billions in cash on hand.

The bottom line: Buy NIO.

And if you’re still — still — looking for more EV action, let me make it easier for you.

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Joseph Hargett

Editor, Great Stuff