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When It Comes to NIO Stock, Risk Still Outweighs Reward

Luke Lango

Following an initial burst of enthusiasm on Wall Street in early September, shares of Chinese electric vehicle (EV) manufacturer NIO (NYSE:NIO) have been stuck in neutral. And when I say neutral, I mean neutral. NIO stock has consistently just bounced between $6 and $8 for the past four-plus months.

When It Comes to NIO Stock, Risk Still Outweighs Reward
When It Comes to NIO Stock, Risk Still Outweighs Reward

Source: Shutterstock

This range-bound trading in NIO stock will persist. The reality is that, while there some positives about the company and the stock, the negatives far outweigh those positives at the current moment. Thus, until there is some breakthrough in the fundamentals, NIO stock will remain stuck in neutral.

Unfortunately, there is no visible breakthrough on the horizon. Right now, competition risks continue to mount. As they do, profitability and valuation risks are also rushing to the forefront, all while the stock is at the top end of its historical trading range.

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Net result? There aren’t any buyers at $8. Just sellers, meaning the next move in NIO will likely be lower.

Things to like About NIO

To be sure, it’s not all bad when it comes to NIO. Indeed, there are many things to like about this company and stock.

First, NIO is in the right space, at the right time, and in the right location. The EV market is just starting to come into its own on a global scale, and has a huge growth runway in front of it over the next decade-plus.

Also, China will be a focal point of this EV revolution. Not only is it the world’s biggest car market, but EV adoption there has been robust and surprisingly resilient to recent economic weakness.

Second, NIO is also seeing exceptionally healthy demand for an early-stage company in this EV space. In the first six months of deliveries in 2012, Tesla (NASDAQ:TSLA) delivered 2,600 Model S vehicles.

In the first six months of deliveries in 2018, NIO expects to deliver 10,000 ES8 vehicles. NIO also has more reservations for its vehicles today than Tesla had back when it was first starting out with Model S production.

Third, NIO has great branding. Taking cues from Tesla, NIO has worked hard to turn into a lifestyle brand that does far more than just sell cars. This include NIO’s pop-up retail shops that essentially are “swanky clubhouses” for their customers. NIO also has a luxury apparel line. These are positive developments for NIO stock in that they create greater brand awareness, loyalty, and demand.

Fourth, the company is rolling out new EV models. In late 2018, NIO launched the ES6, the SUV companion to its already wildly popular ES8. The more vehicles NIO launches, the broader reach the company will have, the higher demand will go, and the bigger revenues and profits will get.

Overall, there are things to like about NIO and NIO stock. But, those positives simply aren’t enough to compensate for the risks.

The Negatives Outweigh the Positives

There are three big negatives when it comes to NIO stock: competition, profitability, and valuation.

On the competition front, it’s no secret that Tesla owns this space. To be sure, that dominance is mostly restricted to the U.S. and parts of Europe right now.

But, Tesla is rapidly growing market and mind share in China, and with Tesla’s China gigafactory officially under construction, it’s only a matter of time before Tesla fully levels the playing field with the local Chinese competition. As such, while NIO’s ramp is impressive today, it may ultimately be thwarted by Tesla’s aggressive expansion into China.

On the profitability front, NIO still runs at negative gross margins. Tesla runs at 20%-plus gross margins, and they are having trouble cutting prices on their vehicles to levels that are affordable for the bulk of users. Thus, NIO projects to have a much harder time doing the same.

To be sure, NIO might not have to do that. They might keep prices high forever. But, that ultimately just limits this company’s addressable market, and will also ultimately thwart today’s impressive ramp.

Meanwhile, with respect to valuation, there is a lot priced into NIO, without a lot for investors to hang their hat on. Consider this: Tesla has a market cap of $52 billion, about seven-fold that of NIO’s $7.5 billion market cap. But, Tesla did about 250,000 deliveries this year, about 25-fold NIO’s 10,000 projected delivers.

Thus, despite Tesla delivering 25-times as many cars as NIO this year, Tesla’s market cap is only seven-fold that of NIO’s market cap. That’s an unfavorable valuation set up for NIO stock.

Overall, the negatives here are just too big to ignore. They ultimately cloud the long term bull thesis with enough uncertainties to keep investors at bay.

Bottom Line on NIO Stock

NIO has huge long term potential if you think the company can successfully lower vehicle prices, fight off Tesla competition, become the go-to EV brand in China, and do all that while maintaining reasonable profit margins.

That’s a tall order. As such, the long term bull thesis in NIO stock remains clouded with risks at this point in time.

As of this writing, Luke Lango was long TSLA.

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