Watch Out! Nio Stock Is Headed for Trouble.

Stocks to sell

In early September, I chose Nio (NYSE:NIO) stock as my top electric vehicle (EV) stock pick. Now, however, I’m having second thoughts. There’s no need to panic-sell your Nio shares, if you have any. However, it’s not a great time to add to a share position or start a new one.

As we’ll see in a moment, Nio is using a capital-raising method that some investors might not like. Additionally, Nio is trying out a new product that has no guarantee of succeeding. So, let’s delve into the details and see what Nio’s been up to lately.

NIO Stock Drops After Debt Issuance Announcement

Not long ago, Bloomberg discussed a debt issuance trend in China that some onlookers might find troubling. Reportedly, China’s borrowers have raised $12.8 billion in proceeds via convertible bonds. Furthermore, that $12.8 billion includes Nio’s recent $1 billion convertible bond issuance.

Thus, Nio is part of China’s convertible bond boom, and it seems that the automaker is unapologetically using this type of debt instrument to raise capital. It’s not a free loan, though. Nio will end up paying a coupon rate (i.e., interest rate) as high as 4.625% on this $1 billion in new debt.

Nio “said it plans to use part of the proceeds to repurchase some of its existing debt securities, among other purposes,” according to Bloomberg. That’s fine, but evidently investors weren’t bullish on this development. Nio shares in Hong Kong “slumped as much as 14%” on the day of the debt issuance announcement.

Why did NIO stock slump? Steven Leung, executive director at UOB Kay Hian Hong Kong Ltd., suggested that the debt issuance points to Nio’s desperate financial condition. “The convertible bond issuance at the expense of share decline indicates the urgency for the company to raise funds,” Leung clarified.

Nio’s New Smartphone Might Not Be a Great Idea

Needless to say, the smartphone market is highly competitive. Many consumers are loyal to their phone brands and wouldn’t easily be persuaded to switch.

Nevertheless, Nio is taking the bold step — or perhaps I should say, the reckless step — of entering into the smartphone market. I liked the idea of the Nio Phone when I first thought about it, but now I’m wondering whether it will actually succeed.

Bloomberg‘s article title sums it up: “Unprofitable China EV Maker Nio Unveils Phone for Drivers.” The key word here is unprofitable. Nio will undoubtedly have to spend money to advertise and commercialize its new smartphone model. But can the company easily afford these expenses?

As a reminder, Nio’s second-quarter 2023 revenue declined 14.8% quarter over quarter and decreased 17.8% year over year. Moreover, Nio’s net earnings loss more than doubled from 25 cents per American Depositary Share (ADS) in the year-earlier quarter, to 51 cents per ADS in Q2 2023.

It’s too early to know whether Nio’s smartphone will be a success or a failure. The problem, however, is that Nio isn’t in a great financial position to afford any big failures. Really, the company should bolster its bottom line before trying out a new, potentially costly venture like introducing a smartphone.

NIO Stock: It’s a Time for Caution, Not Confidence

Frankly, it’s not a great time to take a new share position in Nio or add to your existing stake. Nio’s debt issuance seems to indicate that the automaker is in desperate need of capital.

At the same time, Nio is hastily venturing into a fiercely competitive smartphone market. This isn’t Nio’s core competency, and it could be a costly misstep. Consequently, for now at least, I recommend not making any new purchases of NIO stock.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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