Why Are Shorts Taking Positions?
NIU (NIU) is a manufacturer of smart e-scooters from China. Investors should distinguish the company’s name from that of NIO (NIO), the chinese manufacturer of cars. Interestingly, NIU took a name, which is very close to that of a leading company in China.
NIU presents its business model with the following words:
We currently design, manufacture and sell high-performance electric bicycles and motorcycles. We have a streamlined product portfolio consisting of seven series, consisting of four e-scooter series, which are our key products and contributed to the majority of our sales, two urban commuter electric motorcycles, and one performance bicycle series. We have adopted an omnichannel retail model, integrating the offline and online channels, to sell our products and provide services.
The company sells e-scooters and a mobile app. The manufacturer has not designed anything extremely new. In the nine months ended September 2020, the company’s R&D expenses were equal to RMB48 million. Hence, the amount of R&D expenses is very limited, representing only 3% of the total amount of sales in the cited period. If you invest that amount of dollars, you cannot really create new technology. Without new technology, most investors will not really expect a significant amount of future sales. It really explains why short sellers are taking large positions in NIU.
That’s not all. The company does not seem to be receiving good feedback from clients. I checked the feedback given by NIU clients on the Apple store website. Many customers mentioned that the app often loses connection with the e-scooter. They have reported many other bugs. NIU is a young start-up, so I understand that the app may have certain bugs. With that, I don’t see why the company is trading with a market capitalization of more than $2 billion in New York. Companies with such large valuation are massive businesses. If they are software companies, their apps are usually bug free.
Read some of the issues reported in the lines below. This client noted that the battery level reported by the app was not correct:
Excitedly bought a brand new NIU 2 weeks ago and the battery is a dud! All of a sudden just wouldn’t work. NIU won’t immediately replace it even though I just purchased the bike 2 weeks ago. They have to diagnose it first to see if they can fix it before they decide whether or not to give me a new battery. I don’t want a repaired battery on a brand new bike! NIU company should show good customer service and immediately replace it with a new battery. Such a disappointment from a supposed high end company! What’s more stupid is that the APP says my battery is at a 98pt level. Ummm, wrong! Totally inaccurate!
In 2018, another client called Mikedaddi noted that the GPS with Google maps did not work:
Very disappointed that the one most important feature with this app (GPS with Google map) doesn’t work in China. Please switch to other map. Google map is the only map that is blocked in China that I know of. Otherwise more thief will start stealing this scooter knowing that the GPS map doesn’t work.
Current NIU sales are worth $300 million. The company believes that it could generate as much as $1 billion in two years. As said, the market capitalization is larger than $2 billion, which is significant for a business with less than 600 employees. It means that some investors do believe that the company will be able to generate that amount of sales. Besides, the market believes that NIO will be able to hire and train a significant amount of employees in an extremely short period of time. At the end of the day, with less than 600 employees, you can’t generate sales of $1 billion. With these figures, it makes a lot of sense that many investors doubt that the company can be worth $2 billion. Yes, there are many pessimistic investors out there. However, many times they are correct.
Short sellers are taking large positions at NIU because of several reasons. In my view, feedback received from customers does not help the company. You cannot really expect making $1 million in sales when your clients are reporting many bugs. Besides, the company does not seem to be investing a significant amount of money in research and development. You can’t have new revolutionary technology if you don’t invest in R&D. As a result, I would not expect sales growth to be massive in the future. To sum up, in my view, many things need to change inside NIU before shorts close their positions.
Disclaimer: I don’t hold shares of NIO, TSLA, or NIU. But, I may start a short position in NIU soon.