When Nio (NASDAQ:NIO) staged an incredible rally for the week, rising from around $14 to a 52-week high of $20.97, management took advantage of the rise. The company announced a proposed offering of 75 million American Depository Shares (“ADS”) on Aug. 27. Underwriters may buy another 11.25 million ADRs. Nio fell a pronounced 6.94% the next day but ended the week up 31%. Nio stock is now up 14.5 times from 52-week lows.
What should investors do after Nio’s share offering filing?
Nio Stock Upside From International Expansion
Nio said it would use the capital raise for increasing the share capital of and its ownership in Nio China and buy back equity interests held by minority shareholders. Those actions do not create any business value for the firm but does simplify the ownership structure. It also said it would use the funds for research and development in autonomous driving technology.
On its Q2 conference call, Nio said it already increased its investment in autonomous driving. It has 200 people focusing on its development. So, the stock issuance will either accelerate its progress or widen the technology complexity.
This ultimately strengthens Nio’s position against its competitors like Tesla (NASDAQ:TSLA) and the U.S. automobile manufacturers.
Nio also said it would use the net proceeds for global market development. This might imply an international expansion to markets outside of China. Investors may look at this strategy cautiously. Increasing the addressable market to grow revenue does not come without risks. For example, when Fitbit’s fad started fading in its home markets, the company expanded internationally. It lacked the staff and capital to succeed.
Nio should strengthen its core market in China first, increase unit growth, and ward off competitive pressures in the region. When it strengthened its moat, it may use the free cash flow generation to invest outside of China.
Pressures Ahead
Strong demand for XPeng (NYSE:XPEV) stock, when it IPOs, might pressure Nio. On the markets, investors may look at XPEV stock as the next hot electric vehicle stock. The selling of Nio shares for XPEV would hurt its stock price.
Still, XPeng has legal trouble already. A former Tesla staff who stole trade secrets may prove problematic for XPeng. The company filed a motion to quash. If it loses its case against Tesla, then Xpeng will not have an autonomous driving function in its EVs. Nio would ultimately benefit if its domestic competitor fails.
For now, the strong sales of Tesla Model 3 is Nio’s greatest problem. In July 2020, Model 3 sales topped 11,575. Nio ES6 trailed in sixth place with 2,610 unit sales.
Nio’s Seasonality performance over the S&P 500
The chart above suggests that the seasonal strength is at an end. After rising in June through August in past years, the stock may fall in September.
Opportunity for Nio
Nio’s battery subscription service is a positive catalyst. By leasing the battery to consumers, Nio may charge a lower price for the EV, cutting $10,100 from the vehicle price. In return, customers will get a battery subscription for $140 a month. They may swap a drained battery for a charged one. This removes any wait time for battery charging. And according to the Green Car Report, Nio “has had a high level of success with battery swapping in China.”
Once Nio establishes its network for battery-as-a-service in China, it may apply the same business model in its future international markets. Nio would have an edge against the competition with the service.
For example, if the U.S. allowed Nio to enter its market, Nio could offer a premium ES6 or ES8 EV. Consumers would choose those models over a Tesla and get to swap out the battery whenever they needed to.
Suddenly, the 30-minute plug in time for charging a Tesla would become too long a wait. Conversely, a Nio owner could swap a battery without waiting at all. In China, Nio deployed 143 battery swap stations. They are located across 64 cities. Nio CEO William Bin Li said that the company already completed over 800,000 battery swaps.
Your Takeaway
Nio’s stock sale may trigger further selling and justify the average $13.83 downside target from analysts (per tipranks). Wait for the increasing bearish sentiment to end before considering this stock.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.