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Why NIO Is Not the Tesla of China

Chris Lau

Positive coverage of NIO (NASDAQ: NIO) on 60 Minutes at the end of last month sent NIO stock above $10.

Nio stock price

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The bad news for owners of NIO stock is  is that the company’s fourth-quarter results, issued on Mar 5,  threw cold water on the company’s near-term prospects. The idea that Nio is the Tesla (NASDAQ: TSLA) of China has been proven very wrong. Investors now need to ask why NIO stock price is below $6, well-below its 52-week high of $13.80.

The Tesla Comparison

Up until 2013, Tesla stock traded in the low double-digits and faced similar selling pressure. But after that, its shares rocketed higher.

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At the time, TSLA benefited from its status as the first major electric-vehicle (EV) company in the world. since Tesla was the only choice for  investors who wanted to buy a sold, pure play  on the EV revolution.

Today, NIO’s EV ambitions are confined to China’s market. Plus, it has to compete with Tesla, whose performance in the region has been mixed. But NIO’s latest report exposed unexpected near-term headwinds to its business.


Fourth-Quarter Results

NIO reported  that its revenue had jumped an impressive 133.8% year-over-year to $499.7 million. However, the bad news is that the company still lost money. Its loss from operations was $501.3 million, up 22.7% sequentially and 106.4% from last year. Even with share-based compensation excluded, NIO still lost $480.7 million from its operations.

For all of 2018, NIO lost $3.39 billion, more than double its 2017 loss.

NIO ended the year with $1.22 billion of cash, which suggests the company will not need to sell shares or issue debt to fund its operations in the near future.

Weak First-Quarter Outlook

NIO stock price fell close to 40% in just one week because the company said that its deliveries would drop in Q1, versus the same period a year earlier.

Many of NIO’s customers tried to make their orders in Q4,  ahead of the  Chinese New Year and ahead of the reductions of EV subsidies in China for this year, hurting the company’s Q1 results.

NIO believes the economic softness which has hurt  China’s auto industry is temporary. Moreover, the long-term growth potential of the sector is unchanged,.

Over the longer term, NIO’s heavy investments in R&D will give it a lead over its competition.

Opportunity

NIO officially launched the ES6, a premium SUV with impressive specifications, in mid-December 2018. With 510 kilometers of range and acceleration from zero to 100 km/hr in 4.7 seconds, this model should benefit from strong demand when NIO starts delivering orders of the vehicle in June.

NIO forecast ES8 deliveries of between 3,500 and 3,800 in Q1. This will add to the 14,000 ES8s that are now on the road. Though ES8 deliveries declined 52%-54% in Q1, sequentially, the model will build rapport with the public. Over-the-air software updates, the opening of more NIO dealerships across China, and the growth of NIO’s app to 800,000 active users may also lift ES8 sales in 2019.

The Bottom Line on NIO Stock

Only two analysts cover NIO stock, and they have an average price target of around $10. Since the selling pressure  on NIO stock is not yet over, investors should wait for the dust to settle before buying NIO. The uncertainties of China’s economy are still high, but the economy will likely improve if the government cuts taxes and provides more incentives to buy cars.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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