Nio (NYSE:NIO) stock has reversed course in recent weeks. The stock had long fallen on mounting losses and slowing sales in the Chinese vehicle market. However, improving conditions and a key partner helped Nio stock to recover.
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Unfortunately, NIO remains one of hundreds of electric vehicle (EV) makers in the market. Moreover, the company continues to lose money. Its current stock price makes stock dilution a limited solution at best for more funding. Although the Chinese EV market will likely continue its growth, investors should not assume that the benefits will accrue to Nio stock.
The Chinese EV Market and Nio Stock
To be sure, EVs look to have a bright future in the People’s Republic. Qian Yang, a doctoral candidate in finance at Michigan State University, made two critical points.
First, electric vehicles remain a bright spot in the Chinese automotive market. While overall vehicle sales fell by 10.3%, sales of “non-conventional vehicles,” which include EVs, increased by 20.8%.
Secondly, while EV sales growth has fallen, a 67% reduction in subsidies is the likely explanation. Yang believes removing subsidies will improve profitability by shifting production more toward premium vehicles. He also thinks more mergers and acquisitions will consolidate the industry and improve efficiency.
However, despite optimism about the overall EV market, I have long encouraged investors to avoid Nio stock.
NIO is only one of many EV manufacturers in the country. The market had 486 companies in this business as of March. These manufacturers produced nearly 1.3 million EVs in 2018. Of those, Nio made only 11,348 of those cars. Nio stock gets the attention precisely because a Nio stock exists. No other Chinese EV companies have made the effort to launch an initial public offering on U.S. exchanges.
Moreover, NIO and its Chinese peers must compete with Tesla (NASDAQ:TSLA), who is building a Gigafactory in Shanghai. Volkswagen (OTCMKTS:VWAPY) has likewise made bets on the Chinese EV market. One cannot also rule out Ford (NYSE:F), General Motors (NYSE:GM), and other large automakers making similar moves.
Move Higher Makes NIO a “Lottery Stock”
My advice to avoid Nio stock has mostly proven correct. NIO fell deep into penny stock status. Investors also stopped calling it the “Tesla of China” as the equity kept dropping.
However, in recent weeks, it has bounced from a low of $1.19 per share. Now trading at about $2.20 per share, investors have bid the Nio stock price higher on signs of optimism.
Nio stock bull Luke Lango points to a collaboration with Intel (NASDAQ:INTC) on self-driving cars. He speculates that Chinese EV makers will sell between seven and ten million vehicles per year by 2030. He believes that could amount to annual sales of 375,000 units by that time or 5% of the market.
His theory could prove correct. However, given a current market share of 1%, I feel less optimistic. In time, the market will begin to consolidate and only a handful of companies will survive. Where this leaves NIO remains unclear. Analysts predict losses beyond 2021, so I do not know where Nio will find the capital to take over other companies. In the end, investors need to prepare for the likelihood that companies who do not trade on U.S. exchanges may take the lead.
Traders should also note that Mr. Lango refers to Nio stock as a “lottery stock” despite his bullish stance. If investors buy into this rally, they should treat NIO as such.
Although it has begun to recover, investors should remain cautious on Nio stock. Industry researchers such as Qian Yang point to a bright future for the Chinese EV market. While I agree with his assessment, this does not necessarily mean that NIO will benefit in the end.
At its current price, the cost of one share of Nio resembles the cost of a lottery ticket. If one chooses to spend this money on Nio stock instead, fine. However, much like with lottery ticket money, one should hope for the best but prepare themselves to lose it all.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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