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Predictable Nio Is Worth a Shot

James Brumley

Even with the bulk of the bounce Nio (NYSE:NIO) shares made in July remaining intact, it’s difficult to categorize Nio stock as anything but a disappointment. The current Nio stock price near $3.40 is barely more than half its December IPO price of $6.16, and it looks like China’s EV market is starting to slow down. There are multiple reasons for the headwind.

Nio Stock is Worth a Shot, Because Nothing's Been a Surprise Yet

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Pessimistic analysts and investors have had a field day with the meltdown of the stock, of course, not to mention the very idea that making EVs would be a profitable venture anytime soon.

The thing is, none of Nio’s story to date is truly surprising. More important, the story could be about to make a turn for the better.

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Nio Falls Short of the Unfair Hype

It’s one of those secrets few investors are willing to publicly concede, but privately know. That is, sometimes hype gets the better of them.

One doesn’t have to look very hard to find several relevant examples. GoPro (NASDAQ:GPRO) undoubtedly makes the best action camera in the world. But, as it turns out, the world just doesn’t need that many action cameras. Everyone wants to live healthier, but a Fitbit (NYSE:FIT) isn’t quite the solution people are looking for.

In that same vein, the premise of a rival to Tesla (NASDAQ:TSLA) — which has admittedly mainstreamed electric vehicles — sounded compelling.

Reality has set in over the course of the past few months, however. The 3,553 EVs Nio delivered in the second quarter of the year isn’t even close to being on par with Tesla-like production levels, and nowhere near enough to even put the company within striking distance of profitability.

That was never going to happen … at least not yet. Starting a whole new kind of car company from scratch, as it turns out, isn’t easy.

Matters have seemingly worsened in the meantime. Though demand for electric vehicles in China, where Nio is almost entirely focused, was rock-solid last year, growth in the number of purchases in May fell to only 2% on a year-over-year basis. And that was the last month a $10,100 subsidy was available. It decreased to $3600 in late June.

It looks bad.

None if this, however, was truly unexpected. The bad news is also largely (albeit not completely) out of the way.


Halfway Through the Post-Hype Reset

If the idea rings familiar, it may be because yours truly more-or-less suggested the same thing in May. Specifically, I noted at the time:

As we’ve seen far too often within just the past several months, investors are willing to dive head-first into a euphoric initial public offering based on a story, ignoring the fact that it’s a sales pitch. Only afterwards do those pesky fundamentals start to matter, deflating puffed-up public offerings. Nio is the real deal, though. Even analysts expect big things soon. The period between the public offering and validation, however, could be a rough one.

It’s a scenario that’s similar, though not identical to, Tesla’s early days … which also required CEO Elon Musk to validate the idea of electric vehicles, figure out the infrastructure and simultaneously make the EVs he was looking to sell. For Nio, at least the proof-of-concept step has been completed.

There’s still turbulence ahead though. With the end of most of China’s subsidies, corresponding higher prices are expected by some to push some of China’s EV-related startups into bankruptcy.

That may ultimately be a good thing for Nio though, as the only comparable competition in a position to survive China’s EV headwind is Xpeng, backed by Alibaba (NYSE:BABA).

As time passes and picks off China’s wannabe EV players, Nio will get better, and China’s consumers will further embrace the more-proven concept of battery powered automobiles. EVs are an inevitable future, even if it’s a distant future.

Looking Ahead for Nio Stock

As I also cautioned in May, the “in the meantime” could prove rather miserable. Although Nio stock has stopped its profuse bleeding from earlier in the year, the recent rebound may or may not be built to last.

There’s also the not-so-small matter of a tariff war between China and the United States that, despite what some suggest, is hurting China considerably more than it’s hurting the U.S. Sales of all vehicles, including combustion-powered vehicles, were down more than 16% on a year-over-year basis in May, but have been negative since July of last year.

Meanwhile, Nio hasn’t made much of a dent in Europe, and though eyeing the U.S. market, it’s done little to prepare for a serious entry into North America.

All of those impasses are subject to change in China as they have in the United States.

It was wobbly at first, but the EV business in the United States can stand on its own, without subsidies. The charging infrastructure here is now somewhat pervasive; Nio has 300,000 charging stations working to its advantage in China, dwarfing Tesla’s charging network. Electric vehicles are also not subject to China’s anti-pollution efforts, which limits the number of days a combustion-powered vehicle can be driven during any given week. An end to the trade war could reinvigorate China’s economy.

It was never going to be a get-rich-quick affair, but here in the dregs of despair, Nio stock might be worth stepping into as a small buy-it-and-forget-it trade.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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