Chinese electric car maker Nio (NYSE:NIO) is a tempting pick for investors who are looking for bargain buys in today’s market.
Not only is the firm working within an industry that’s set to grow exponentially over the next decade, but it’s based in China where the growing middle class makes for a huge addressable market. While many have dubbed Nio stock as the “Tesla (NASDAQ:TSLA) of China,” it carries a huge amount of risk which may be reason enough to stay on the sidelines.
Why Pick NIO
There’s no shortage of coverage regarding Nio’s potential payoff if things go to plan. That’s understandable. After all, 2019 has been a difficult year for the electric vehicle maker. The Nio stock price has lost 75% of its value in just 8 months — can it get any worse?
After hitting a low near $1 per share in October, NIO has rebounded considerably to $2.70 at the time of this writing. For those who didn’t want to chance it back in October, it’s tempting to jump on board to ride out the rest of the rally.
A prolonged recovery isn’t totally out of the question, either. As my colleague Luke Lango pointed out in November, the stars are starting to align for Nio stock. China’s economy has been on the upswing in recent months with consumer sales and purchasing managers’ index (PMI) figures looking more and more positive.
Plus, with trade worries easing, Chinese stocks have made it back into Mr. Market’s good graces. Those factors take away from some of the gloom hanging over Nio stock.
More importantly, NIO’s business has started to show signs of life. After a rocky start to the year, NIO’s third-quarter deliveries finally appeared to be back on track. On top of that, the firm’s October delivery figures pointed to a bumper fourth quarter.
The Downside to Nio Stock
October’s 2,526 vehicle deliveries were a whopping 25.1% increase from the previous month. However, in November, deliveries were just 2,528 vehicles — just two cars more than the previous month.
That should raise a red flag. While flat is better than a decline, it’s not the explosive rise everyone was hoping for. What’s more concerning is the fact that the firm is still aggressively expanding with 37 new NIO spaces opened by the end of November.
Earlier this year, I wrote about the fact that NIO’s finances were in trouble because of the rate the firm has been burning through cash. At the time, vehicle deliveries were miserable and the Chinese economy was still a major question mark. But I wouldn’t say NIO is totally out of the woods because of its October deliveries figures. One month does not equate to a recovery.
It’s worth noting that although the deliveries figures are better than they’ve been, they’re still below where they were in 2018. Plus, 2,067 of the firm’s November deliveries were ES6 models, which the firm is selling at a loss. On the plus side, that’s lower than the 2,220 that made up October’s impressive deliveries figure. However, it does cast a shadow over the data.
Until deliveries are on track to show growth (more than two cars worth of growth), management should be conservative with its spending.
Needle in a Haystack
There’s certainly a case for Nio stock. Growth in the electric vehicle market is likely to be explosive over the next few years, especially in China. Nio has the potential to become a leader in that market. However, so do the other 486 Chinese EV companies operating in China.
And many of those other firms are using a standardized platform called MEB, unlike NIO which has opted for a different platform. That could create a problem down the road for a few reasons.
First, it could create regulatory problems as Beijing has been behind the MEB platform. Not only that, but the MEB platform also has the support of big names like Ford (NYSE:F) and Volkswagen (OTCMKTS:VLKAY). You have to ask yourself if you trust Nio’s management enough to go against the grain on such a widely accepted platform.
The Bottom Line
Nio stock has the potential to be a major moneymaker for those brave enough to take a position. But then again, so does the roulette wheel and the blackjack table.
If you’ve got nerves of steel and you’re comfortable gambling, NIO could be a good pick. However, while the market is certainly on a high right now, there are better, more stable discounts to be had if you look hard enough.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.