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Nio Stock Isn’t Cheap When You Factor in Competition and Recalls

Tom Taulli

During the past few weeks, Chinese electrical-vehicle manufacturer Nio (NYSE:NIO) has been in the fast lane. Nio stock up about 40% or so to $3.50. Yet the shares are still well off their highs. The stock was more than $10 in late February.


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Nio Stock Isn't Cheap When You Factor in Competition and Recalls

It’s also important to keep in mind that the company is a recent IPO. Yet it certainly hasn’t enjoyed the enthusiasm of many other operators like Zoom Video Communications (NASDAQ:ZM), Anaplan (NYSE:PLAN) and Pagerduty (NYSE:PD).

But hey, IPOs can certainly make nice comebacks, right? So with Nio stock, might there be one brewing? Or should investors be skeptical?

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A Closer Look at Nio

Well, there are certainly some positives. Keep in mind that the sentiment for Nio stock had gotten to horrible levels. Thus a bounce back is reasonable. And there was probably short covering (this is when short sellers buy back shares to cover their positions). As of late June, about 15% of the float for Nio was shorted.

But there were also some fundamental factors at work. Perhaps the most important was that the second quarter saw a pick-up in deliveries, which came to 3,553. This was above the company’s quarterly guidance of 2,800 to 3,200 (albeit, this forecast was fairly conservative).  In June, NIO also launched its ES6 five-seater premium SUV and the results were encouraging. Deliveries were 413.

But despite all this, there are still some negative factors, and I think they could easily outweigh the positives. For example, Nio recalled more than 4,800 units of the ES8 (or close to 30% of the total deliveries for the company’s history). The reason: There were three battery fires.

Nio Recall Woes

It’s encouraging that Nio has been proactive. Let’s face it, the auto industry can be resistant to recognizing problems. Yet the recall is still something that points to quality issues, which is never a good thing for a premium vehicle. It also does not help that there are already general worries about EVs.

In fact, the company’s business model, which relies on the manufacturing of the vehicles from another company, could be an issue. That is, there could be more vulnerability to quality issues as Nio does not have as much control.

But there is something else about the business model: It means that the margins are quite low. In other words, it could be tough for Nio to realize the benefits of the economies of scale as the company grows. And yes, this could be limiting for the stock price.

It also does not help that Nio continues to burn money. During the latest quarter, the operating loss was a hefty $366 million. But the cash on hand is only about $1.12 billion and the debt load is $1.35 billion.

In light of this, it would not be surprising to see another equity raise – and this would mean more dilution for the stock.

Bottom Line on Nio Stock

Even though the Chinese government has been cutting back on subsidies, there still is considerable support to promote the EV industry. This is definitely good news for Nio stock.

But then again, the company has to fight fierce competitors like BYD (OTCMKTS:BYDDF) and Beijing Electric Vehicle Co. Consider that there are nearly 486 registered EV manufactures in China! So it will be tough to stand out. It also does not help that the Chinese economy is slowing down, despite efforts to stimulate growth.

All in all, there’s quite a bit of risk with Nio, and it’s probably best to hold off for now.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow 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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