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Why Nio Stock Suddenly Reversed Today

What happened

After opening in the green this morning, Nio (NYSE: NIO) stock dropped sharply after 10:30 a.m. ET and hit a low of 4.1% by 10:54 a.m. ET. A short-seller attack is to blame for the electric vehicle (EV) stock's reversal today.

So what

Tuesday morning, Grizzly Research, which claims to do "in-depth due diligence" of publicly traded companies to produce "differentiated" research, alleged Nio of using an "audacious scheme" to inflate revenue and profitability.

In its short-seller report, Grizzly Research raised several allegations against Nio. Among other things, it primarily believes Nio has used Wuhan Weineng, a third party, to inflate its numbers and beat the already lofty analyst estimates.

Specifically, the researcher estimates sales to Weineng have inflated Nio's revenue and net income by almost 10% and 95% respectively so far and alleges Nio is pulling off this accounting game through corporate governance wrongdoing.

Nio is well known for its battery-as-a-service (BaaS) program, through which a customer can buy Nio cars without batteries for low prices and instead rent and swap batteries as required as part of a subscription. Nio sells these battery packs to Weineng and recognizes revenue from those sales. Weineng earns the subscription fees.

Grizzly Research claims its investigation revealed Nio had "oversupplied" battery packs to Weineng in recent quarters only to inflate its revenue. It also highlighted links between Weineng's and Nio's executives and share agreements that could materially dilute shareholder wealth in the future.

Now what

Nio stock was under considerable pressure for several months, and it's only over the past month or so that the stock has bottomed -- as of this writing, Nio stock has rallied 28% in June alone. Nio reported strong deliveries last month and is focused on new vehicle launches that are expected to start contributing to its sales in the coming months.

Just when investors believed Nio's worst days were over, today's short-seller attack reminded them of the potential risks of investing in a Chinese start-up in a young industry. Investors, however, might want to wait for Nio's response to Grizzly Research's allegations instead of panic-selling.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio Inc. The Motley Fool has a disclosure policy.


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