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3 Reasons To Be Cautiously Bullish on NIO Stock

Tom Taulli

Nio (NYSE:NIO), a leading Chinese electric-vehicle maker, went public in September. The shares quickly spiked from $6.26 to $13.80. But the NIO stock price move proved to be temporary. Currently, it is back near it is initial offering price.

With the harsh correction last year, many IPOs have gotten hit hard, but Nio stock had some other issues as well. Let’s face it, Chinese tech stocks have been out of favor because of President Trump’s tough talk on trade. The result is that major operators like JD.com (NASDAQ:JD) and Alibaba (NYSE:BABA) have have seen steep drops in their stock prices.

But for Nio stock, there are also nagging concerns about competition. Consider that home-grown companies like BYD (OTCMKTS:BYDDF) and Geely Automobile Holdings (OTCMKTS:GELYF) have been pouring resources into the EV category. And of course, Tesla (NASDAQ:TSLA) is another formidable rival.

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So all in all, Nio stock is quite risky, and it seems like a good bet that the volatility will continue. Yet despite this, the company has the opportunity to become a large company in China, which should represent a nice opportunity for investors — at least for those who can stomach the twists and turns!

Here’s a look at some of the positives for NIO:

Nio Stock Advantage: Innovation

Nio is a relatively young company, having been founded in 2014. Yet it has made tremendous progress.

In 2017, Nio launched the ES8, a high-performance electric SUV. A 7-seater with an aluminum alloy body, it can go zero to 100km per hour in 4.4 seconds. The driving range is also 335km.

Then in late 2018, Nio came out with the ES6. It has dual motors, a state-of-the-art braking system and acceleration to 100 km/h in 4.7 seconds. As for the structure of the vehicle, it includes aircraft-grade 7 Series aluminum alloy and carbon fiber. The combination allows for more strength but with less weight.

It’s also important to note that Nio has been pushing innovation with its AI capabilities. For example, it has developed a speech interactive system, Level-2 autonomous driving and the ability to upgrade the systems via FOTA (firmware-over-the-air).

Nio Stock Advantage: Execution

Over the years, many car startups have failed. One of the main reasons is the challenge of manufacturing. Even a few mistakes and miscues can lead to huge losses.

But as for NIO, the company has proven to be quite adept at scaling its operations. It probably helps that it has outsourced production to a Chinese manufacturer (although, NIO will eventually build its own plants).

Last year, the company delivered 11,348 ES8s, which exceeded its own forecast. There were also 3,318 deliveries in December alone. For the most part, NIO is showing strong traction.

According to NIO founder and CEO William Li: “We will continue to focus on market penetration by delivering high-quality products and holistic services to our users and to improve the system efficiency of our development and operations.”

Nio Stock Advantage: Secular Trends

It’s true that the slowing Chinese economy will probably be a headwind for Nio. But the long-term prospects for the auto market do look bright. This is especially the case for the premium segment. Based on research from Frost & Sullivan, the compound annual growth rate is projected at 12.4% from 2017 to 2022.

And yes, China has the largest market for EVs. Currently, the market share is about 4% of overall auto sales. But the Chinese government has an ambitious plan to take this to about 20% by 2025.

In other words, NIO is at the sweet spot of strategic market opportunity and so long as the company continues to execute, it is poised for durable growth.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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