Nio Inc (NIO)

[JohnQQ]

5 Reasons To Short NIO

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The increase in short positions in NIO (NIO), the manufacturer of electric vehicles, is impressive. Many short sellers believe that they will be making tons of dollars when the share price collapses in the following months. I don’t know whether that will happen soon or later. However, I do believe that there is a significant number of reasons to justify a short position in NIO. In this article, I have found five reasons, but I believe that there may exist many others.

Number 1: Lack Of Profits
NIO has never been profitable. While the company reports sales growth, net income has been always negative. As a result, I would not expect that value investors will be investing a single dollar in the company. Short sellers know well about the company’s lack of profits. It explains why so many shorts decided to take a position in the company:

We have only recently started to generate revenues and have not been profitable since our inception. We incurred net losses of RMB5,021.2 million, RMB9,639.0 million, RMB11,295.7 million and RMB2,868.5 million (US$406.0 million) in 2017, 2018, 2019 and the six months ended June 30, 2020, respectively. In addition, we had negative cash flows from operating activities of RMB4,574.7 million, RMB7,911.8 million, RMB8,721.7 million and RMB523.1 million (US$74.0 million) in 2017, 2018, 2019 and the six months ended June 30, 2020, respectively.

Number 2: Lack Of Expertise
NIO has limited experience in high volume manufacturing. Most analysts out there have developed sophisticated mathematical models to justify the current valuation of NIO. They believe that manufacturing 10,000 cars is not as complicated as manufacturing one million. I don’t believe that they really thought about it. NIO does not currently have the due know-how to efficiently manufacture a large amount of cars. Of course, the company will acquire that know-how in the future. However, it will take time, and most importantly, it will take a lot of the shareholders’ money. If you are clever, you will wait a few years before buying shares. Let’s see whether the company manages to compete with BMW, Mercedes, and all the other old brands. Notice that they have manufactured brands for the last 100 years. You don’t get that kind of expertise in one day.

We have limited experience to date in high volume manufacturing of our electric vehicles. We cannot assure you that we will be able to develop efficient, automated, cost-efficient manufacturing capability and processes, and reliable sources of component supply that will enable us to meet the quality, price, engineering, design and production standards, as well as the production volumes required to successfully mass market the ES8, the ES6, the EC6 and future vehicles.

Number 3: Lack Of Infrastructure In China
There is another clear risk that nobody is talking about. NIO customers require a network to travel. You need to have charging stations all over the country to drive an electric car. As NIO noted in its annual report, China does not have a public charging network in place. As a result, many drivers will think twice before buying a NIO or any other electric car. Don’t be naive, the lack of infrastructure will diminish the company’s sales growth.

In addition, although the Chinese government has supported the roll-out of a public charging network, the current number of charging infrastructures is generally considered to be insufficient.