Things are only getting worse for Nio (NYSE:NIO) stock. In addition to the many other woes impacting the Shanghai-based company, such as Covid-19 lockdowns that have hurt its production and deliveries, a vehicle crash that killed several staff members and went viral online and a trademark lawsuit in Europe, Nio now has to contend with a short-seller report that accuses it of deliberately inflating its revenue and profits.
The negative report from Grizzly Research comes at the worst possible time for Nio and is akin to kicking a person when they’re down. NIO stock has fallen nearly 37% this year, and is more than 60% below its all-time high of $61.95 reached in January of last year.
Nio Mauled by Grizzly Research
In a scathing report issued on June 28, Grizzly Research accused Nio of cooking its books to continually beat Wall Street forecasts for its earnings and sales. Specifically, Grizzly Research claims that Nio uses affiliate Wuhan Weineng to juice its numbers.
Nio famously runs a battery-as-a-service (BaaS) program where consumers who purchase Nio vehicles pay a subscription fee to swap depleted batteries for fresh ones rather than shell out big bucks for at-home battery charging infrastructure. However, it is Wuhan Weineng, not Nio, that rents the batteries to Nio vehicle owners. Nio sells the needed batteries to Wuhan Weineng and records the sales as revenue.
Following an investigation, Grizzly Research alleges that Nio deliberately oversupplies battery packs to Wuhan Weineng to inflate its revenue figures. Based on Wuhan Weineng’s inventory levels, the short-seller estimates that Nio oversupplied more than 21,000 batteries to Wuhan Weineng last year, and that the oversupply boosted Nio’s revenue by 10% and understated its net loss by half. This is a major allegation, but not implausible given that Nio reported revenue growth of 122% and a 24% drop in its net loss for full year 2021.
Grizzly Research also questions why Nio immediately recognizes revenue from the sale of batteries to Wuhan Weineng rather than spreading the sales out over the seven year subscription period.
Nio immediately fired back at Grizzly Research, saying that the report contains “numerous errors, unsupported speculations, and misleading conclusions.” The electric vehicle maker also said that it will make relevant disclosures as required by market watchdogs in the U.S., Hong Kong and Singapore, where its stock trades. But so far, Nio has not put forward any disclosures and its stock fell more than 1o% on the day the Grizzly Research report was made public.
From Bad to Worse
The short-seller report is just the latest body blow to NIO stock. It also isn’t the only accounting issue the company has run into this year. In early May, Nio’s share price fell 15% in one day after the U.S. Securities and Exchange Commission (SEC) announced that it is investigating an accounting issue at the Chinese company. The SEC investigation stems from the fact that the auditor Nio used to draft its annual report has working papers that have not been verified by either U.S. or Chinese regulators, putting Nio in violation of the U.S. “Holding Foreign Companies Accountable Act.” The SEC could force Nio to delist its shares from the New York Stock Exchange over the matter, a situation that prompted Nio to quickly list its stock on the main exchange in Singapore in addition to the Hang Seng index in Hong Kong.
In addition to ongoing problems with its books, Nio is also dealing with a raft of other issues that include a lawsuit by German rival Volkswagen (OTCMKTS:VWAGY) over accusations it has infringed on the trademark of VW-owned nameplate Audi, and the deaths of two staff members who were killed in one of Nio’s test vehicles when it fell from the third floor of a Shanghai parking lot that’s situated next to the company’s global headquarters.
Even recent news that Nio produced record deliveries in the month of June couldn’t help its stock price. Although Nio delivered nearly 13,000 vehicles last month, its best-ever total, those deliveries lagged behind rivals XPeng (NYSE:XPEV) and Li Auto (NASDAQ:LI), sending NIO stock down 6% on the news.
Stay Far Away From NIO Stock
Right now, Nio looks like a house on fire. Even if the short-seller report from Grizzly Research is inaccurate, it has done significant damage to Nio’s reputation and share price. Add in all the other problems facing the company, and the fact that its stock is more than 65% below its all-time high, and there’s no good reason for investors to take a position in Nio.
In time, things may improve for the electric vehicle maker. But it will likely take a while for the company to resolve the many issues that are negatively impacting its share price. Investors should, therefore, stay far away from Nio for the time being.
NIO stock is not a buy.
On the date of publication, Joel Baglole 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.