Stock Analysis

NIO's (NYSE:NIO) Shareholders Should Expect Modest Dilution Going Forward

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Yesterday Chinese electric vehicle maker,  NIO ( NYSE:NIO ) announced that the company will be  selling up to $2 billion in American depositary shares (ADSs). The sale will be conducted via an at-the-market offering program, and will result in shareholder dilution of up to 3% at the current share price. The news resulted in NIO’s share price opening 3.3% lower today.

Shareholders shouldn’t be surprised by the share sale after NIO’s share count increased by 47% last year. This dilution was easy to accept as the share price rose over 1,100% in the same period. This year the number of shares outstanding has actually decreased slightly due to a small buyback earlier in the year.

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NIO is a capital-intensive business and will need to make significant capital investments as it continues to increase production. The following chart of NIO’s revenue, earnings and free cash flow, shows us that while the company has generated some free cash flow in the last year, cash flow is expected to fall back into negative territory later this year. Cash flows are expected to turn positive again in 2023.

NYSE:NIO Earnings and Revenue Growth September 8th 2021
NYSE:NIO Earnings and Revenue Growth September 8th 2021

NIO’s debt increased considerably in 2019, which put the company in a precarious position with negative equity. It’s easy to see why the company sold so many new shares last year, and how this has put the company in a much better position.

Fortunately, NIO's revenue growth accelerated last year, which means it was easy to issue new shares.

NYSE:NIO Debt to Equity History September 8th 2021
NYSE:NIO Debt to Equity History September 8th 2021

Can NIO Raise More Cash Easily?

As of June 2021, NIO has cash and short-term investments worth CN¥47b versus short term liabilities of CN¥22b. In addition, the company has long term liabilities of CN¥13b. At this point taking on more debt while cash flow is negative would increase the risk for shareholders, and it makes sense to accept some dilution.

We don't yet have enough data to look at the trend in NIO's cash burn, so operating revenue growth is arguably the best measure of growth we have, right now. Happily for shareholders, the revenue is up an incredible 182% over the last year. However, while the company remains unprofitable, revenue growth will be accompanied by ongoing cash burn.

What this means for Shareholders

Typically, growth companies fund their growth by issuing new shares. This dilution needs to be weighed up against long term earnings growth. In NIO’s case, the amount of cash the company is likely to raise will be closely tied to increases in capacity. The current trajectory suggests there will probably be some more dilution in the future, but not to the extent seen in 2020.

Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company .

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

Valuation is complex, but we're helping make it simple.

Find out whether NIO is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Richard Bowman

Richard Bowman

Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.



NIO Inc. designs, develops, manufactures, and sells smart electric vehicles in China.

High growth potential with mediocre balance sheet.