Two days ago, Chinese electric vehicle maker Nio (NYSE:NIO) spooked investors by announcing a plan to raise up to $2 billion in a new stock offering. Shares tumbled 5% on the news. But the company’s American depositary shares have begun to recover, including today when they were almost 3% higher in early trading. The shares have trimmed those gains, but still were up about 1% as of 11:15 a.m. EDT on Friday.
The market seemed to be surprised by the company’s announcement on Wednesday of a secondary stock offering. After all, Nio already had $7.5 billion on its balance sheet as of June 30.
Some investors possibly thought they must be missing some need for more capital, or just that management felt the shares were so high it was prudent to add to the balance sheet. But if one thinks about it with a longer-term investing framework, adding more of a cash cushion at this point in the company’s life cycle makes sense.
While any stock in a growing sector like EVs can be very volatile, the price move on Wednesday was a knee-jerk reaction to the stock offering. The need for capital makes sense as the company works with its manufacturing partner to double production capacity. Nio is also setting up a business in Norway for its first market outside of China. The company made its first export shipment of its ES8 electric SUVs in July.
And while global supply chain issues are limiting production for many automotive companies, including Nio, it’s clear that demand for EVs in China remains strong. Tesla (NASDAQ:TSLA) saw a strong sequential increase in August domestic sales for vehicles produced at its Shanghai plant, according to a Reuters report.
With demand likely to remain strong well into the future, adding to an already strong balance sheet seems like a smart long-term decision by management. And anyone invested in Nio should certainly be thinking for the long term.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.