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In today’s market, Nio (NYSE:NIO) is among the electric vehicle (EV) stocks in focus for many investors. That’s partly due to the company’s price action, with NIO stock rising more than 5% in early afternoon trading today.
This move comes at an intriguing time for Nio and the industry more broadly. In an internal letter signed by the company’s founder and CEO, Nio outlined a two-part plan Wall Street seems to like.
The first part of the plan, which we touched on earlier this morning, involves deep cost cuts, which will ultimately culminate in Nio cutting around 10% of its workforce. These layoffs, like those announced by so many of Nio’s peers, have been received positively by investors who look for a faster track to profitability for the EV maker. Indeed, the fact that the car manufacturer loses roughly $35,000 per vehicle is something many investors will want to see remedied.
In addition to these job cuts, Nio also announced that it “may spin off non-core businesses to reduce costs and improve efficiency.” This intense re-focusing is something the investor community clearly likes today, given the surge higher in NIO stock since the announced strategic moves.
NIO Stock Surges on Pivot to Efficiency
Nio’s aggressive stance on its capital spending plans and its existing cost structure is something investors are beginning to become accustomed to. A focus on becoming profitable yesterday is something that’s good for investors, as a significant amount of capital was clearly misallocated during the zero interest rate environment we saw for the better part of the past decade.
With a true hurdle rate on investment (companies can simply buy short-dated bonds with their cash and earn nearly 6%), investments need to have a positive ROI in a short time frame. Nio has put a three-year target on profitability for any project investments. That’s certainly a step in the right direction and among the more aggressive targets I’ve seen placed on capital spending.
I think Nio’s management team is certainly making the right moves to create value for shareholders and a brighter future for all. Yes, 10% of the company’s workforce will be let go. However, having a company with a much more robust financial footing ensures a future for the company’s most productive workers, and buyers of Nio vehicles can be assured the company won’t disappear like a flash in the pan.
On the date of publication, Chris MacDonald 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.