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The NIO Stock Price Is Really Appealing If You Can Stomach the Risk

Vince Martin

Chinese electric vehicle manufacturer NIO Inc. (NYSE:NIO) has had a bumpy debut on the public markets. The NIO stock price now sits just above $6, not far from its lowest levels since it went public at $6.26 in September.

That said, in context, the performance really hasn’t been that bad. Investors have been dumping pretty much everything China-related over that stretch. Alibaba (NYSE:BABA) is down 15% since mid-September, and smaller stocks like JD.com (NASDAQ:JD) and Baidu (NASDAQ:BIDU) have done even worse.

Tesla (NASDAQ:TSLA), to which Nio often is compared, has risen – but only modestly, and with quite a bit of volatility.

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Given the weakness elsewhere and the sky-high valuation assigned to NIO stock, the near-term struggles aren’t that surprising. And from a long-term standpoint, they might even be comforting.

Even in a clearly nervous market, investors are willing to pay for NIO stock at the right price. Support now has held multiple times right at $6. Should “risk on” sentiment return, the NIO stock price would seem to have plenty of room to move higher.

That said, investors might have to wait on that front. I wrote earlier this year that NIO stock required patience, and I still think that’s the case. There’s a very interesting story here – but I’m not sure when investors will be excited about buying it.

The Case for NIO Stock

The case for NIO stock is reasonably straightforward. The company is the leading high-end electric vehicle manufacturer in China. The size of that market, combined with a central government intent on increasing EV adoption, creates a massive growth runway for Nio.

The obvious parallel here is Tesla. Both companies are targeting the high end of the market and trying to produce luxury vehicles that happen to be electric, rather than simply ‘good’ EVs.

NIO actually has taken it a step further, developing dealerships that are essentially clubs, including meeting spaces, open kitchens, and play areas for children.

NIO rolled out its SUV this month, its second vehicle. The company delivered over 3,000 units of its ES8 sedan in Q3, a figure that should ramp steadily in coming quarters. Analysts project revenue in 2019 will quadruple to some $2.5 billion.

From there, growth should continue – and at some point, profitability should follow. And if NIO winds up leading – or dominating – the EV space in China, even modest price to revenue multiples suggest a substantial long-term rise in the NIO stock price.

The Risks

As with most growth stocks, risks abound. Most notably, NIO doesn’t yet manufacture its own vehicles. Rather, it contracts with a state-owned company for production. And looking forward, the path to a manufacturing license remains uncertain.

Competition is going to be intense. Tesla is betting big on China. Existing manufacturers like BYD (OTCMKTS:BYDDF) and Geely Automobile Holdings (OTCMKTS:GELYF) are targeting the EV space.

Even U.S. automakers Ford (NYSE:F) and General Motors (NYSE:GM) could roll out electric vehicles in the market. It’s not guaranteed that NIO will be the winner, even with impressive early products.

And perhaps most notably, valuation already is high, even with the NIO stock price near the lows. NIO trades at around 3x next year’s sales, a huge multiple for a manufacturer, particularly one with outsourced production.

The company is burning cash, and while capital raised in the IPO helped the balance sheet, it’s not guaranteed that the company won’t dilute shareholders going forward.

There’s a long way to go here and the near-term risk is that investors will lose patience. Again, Chinese stocks on the whole are at the lows.

Any stumble from NIO or any increase in concerns about the Chinese macro economy could send NIO stock tumbling. The stock might seem cheap near $6 – but the company still is worth some $7 billion. If support breaks, NIO stock could fall much further.

The Case for Patience on the NIO Stock Price

In this market, it doesn’t seem necessary to go rushing into NIO stock just yet. That said, hedged strategies do seem interesting. Investors can sell puts for nice returns: the June 6 put, for instance, last sold at $1.35, a roughly 30% return with an effective price of $4.65.

But this is a stock to watch closely and for investors willing to tolerate risk, it’s at worst intriguing at $6.50. The potential rewards here are enormous if NIO can continue its growth.

And with short interest particularly high, squeezes (like those seen in TSLA stock from time to time) can push the NIO stock price higher as well. I’m just not convinced those squeezes, or that upside, are coming just yet.

As of this writing, Vince Martin has a bearish out-of-the-money options position in TSLA. He has no positions in any other stocks mentioned.

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