Many people colloquially refer to Nio (NYSE:NIO) as the Tesla (NASDAQ:TSLA) of China. The term is meant to describe the company’s attractive and futuristic electric vehicles. The problem is, like Tesla, Nio is running a race to long-term profitability that still seems elusive.
However, a greater concern for investors regarding Nio stock is viability, not profitability. The EV market in China is saturated and the company is lagging behind in sales. Compounding Nio’s problem is that Tesla will soon produce cars in Shanghai. Tesla also has an exemption from the 10% purchase tax levied on most foreign car companies. Once that happens, it could be game over for Nio stock.
Nio Has to Become a Leader in Its Home Country
The bullish hope for Nio stock is the Chinese consumer. Although a McKinsey report confirms that China is the leading market for electric vehicles, it’s reasonable to wonder just how big that market is. InvestorPlace contributor Josh Enomoto wondered the same thing when he pointed out that 35% of China’s labor force works in the agricultural sector.
This makes EVs not only impractical, but also very expensive. Nio’s flagship model, the ES8, lists for around $68,000. While this is a discount to Tesla, it’s still hard to see that price gaining traction to an agrarian population.
I expressed a different concern when I wrote about Nio stock one month ago. I pointed out that Nio is not the leader in the Chinese market despite government subsidies and a favorable regulatory environment. Without a strong presence in other markets, it’s hard to see a path to profits.
Just How Big Is the Electric Vehicle Market?
The electric vehicle market is real and growing. However, much like when alternative energy solutions first came on the scene, mainstream acceptance is an economic, not an environmental, issue.
In fact a 2017 survey conducted by Driving Tests, a driving test simulator, found that a majority of U.S. consumers across all age groups were not interested in owning an electric car. While Chinese consumers may be more accepting of electric vehicles, manufacturers are facing a reality that consumers want convenience. That’s particularly valid when they are paying $68,000 for a car as they are with the Nio ES8.
It’s Not Just About Building Cars
For electric vehicles to gain widespread acceptance will require an entire infrastructure. This ecosystem includes safe, reliable batteries and convenient charging stations that are available in scale.
Nio recently self-reported a battery recall for its ES8 vehicles. In fairness, the battery issue is an ongoing problem for many EV companies. However, the will and the money to build a scalable network of charging stations is a classic chicken-egg question.
With the price of gasoline still at comparatively low levels and the threat of a recession that could bring prices even lower, it’s hard to see consumers trading up to an electric vehicle, even if they really believe in the technology.
Is It the Start of a Recovery or a Dead Cat Bounce?
Nio stock is making a small recovery in advance of the release of its earnings report on September 24. The Nio stock price has climbed above a line of support at around $2.80. And at $3.22, it’s hanging around its 50-day moving average.
However, this move is happening on light volume. This supports my conclusion that traders are seeking a quick profit while they wait for the earnings report.
For the past year, whenever Nio stock has broken above its 50-day moving average, the relative strength index has moved into the overbought range and the stock has quickly declined. Right on cue, the Nio stock price declined on September 11, breaking a six-day winning streak. As of this writing, it was heading for another down day.
What’s next for Nio Stock?
In its earnings report, investors will be looking to see if the company has reversed its declining delivery numbers. Although analysts are expecting Nio to increase its revenue by 126.9% this year and 90% in fiscal 2020, those forecasts may change if Nio cannot prove that it can deliver sales.
Even if Nio can reverse its declining sales numbers, what does winning look like? For all of their bravado, I believe that Nio’s future may be as a buyout target. The future is bright for electric vehicles. But Nio as it presently exists may not be around to see that future.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.