Chinese electric vehicle company Nio (NYSE:NIO) picked the wrong time to go public. Chinese stocks are plunging. Shares of electric vehicle leader Tesla (NASDAQ:TSLA) is down one-third from early August highs. And there’s a clear ‘risk-off’ trade in the market. All three factors would seem to lead to near-term pressure for NIO stock.
Unsurprisingly, Nio has seen tremendous volatility since it went public at $6.26. The stock ran into the double-digits on its second day of trading, for reasons that weren’t entirely clear. It would drop 50%+ from the highs, before rallying as a major Tesla investor took a big stake in the company.
Investors would be wise to let that volatility subside before committing to NIO stock from either direction. There’s an interesting story but a lot of concerns. Recent trading in the market suggests that the concerns may take precedence, at least in the near term.
The Case for NIO Stock
The case for Nio is pretty simple: China is a huge market, and the winner there in electric vehicles is going to make a ton of money. With Nio now valued at about $8 billion (still less than 20% of Tesla) there’s obvious upside if Nio executes.
The numbers here admittedly are pretty ugly. The company booked zero revenue in 2017, and about $7 million in sales in the first half of 2018, according to Nio’s F-1 registration statement. But this is an early-stage company; there’s plenty of room for exponential growth going forward.
With backing from investors like Tencent (OTCMKTS:TCEHY), there’s big and sophisticated money behind the company as well.
It’s a classic growth story. Investors can argue about the numbers, but the core thesis here is simple: if Nio wins in Chinese EVs, its shareholders will too.
The Concerns About Nio Stock
But there are numerous concerns here. The first is that, so far, Nio doesn’t manufacture its own cars. Rather, it has a production agreement with another Chinese manufacturer. That may change at some point, assuming Nio can get a license from the central government.
The second is competition. There are myriad EV startups in China, including Xiaopeng, backed by Alibaba (NYSE:BABA) and now valued at $3.6 billion. State-owned firm Chery has an EV wing now. Nio may be a winner, as it targets the high end of the space (its first vehicle is a seven-passenger SUV). But it won’t have the market to itself, by any means.
Third, it’s important to remember that we’ve been here before. Kandi Technologies (NASDAQ:KNDI) has teased investors for years with a Chinese EV story of its own (albeit a very different one from NIO stock). Faraday Future, backed by Chinese conglomerate LeEco, was supposed to be a Tesla killer; that business and its backer both are collapsing.
And, finally, valuation doesn’t seem all that attractive. $8 billion is cheap in the context of Tesla’s $47 billion market cap. But established Chinese automakers aren’t valued much higher.
Great Wall Motors (OTCMKTS:GWLLF) has a market cap of about US$9 billion. Geely Automotive (OTCMKTS:GELYY) is valued at about US$16 billion. Those are profitable, established, companies. If Nio grows into those types of valuations, which will take years, that doesn’t suggest much in the way of annual shareholder returns.
Be Careful Right Now
For investors intrigued enough by the story to take on the growth stock risk, patience is definitely advised. There’s little reason to see a bottom in the near future.
Chinese stocks are getting hammered, including Nio’s automaker peers. Tesla is headed in the wrong direction. Analysts and investors modeling out-year profits and using peers as comparisons are bringing their price targets down as we speak. An 11% rally based on a single shareholder (who simply could be hedging its TSLA bet) seems particularly silly in that context.
More broadly, this is a market that clearly is running from risk. Whether it’s trade war concerns, rising interest rates, or just profit-taking, equity investors are fleeing risk.
There are few stocks more risky than a Chinese auto company valued at roughly 1,000x revenue. I’m not terribly interested in the NIO stock story, but more aggressive investors might be. Those investors still would do well to hold off for at least a little while.
As of this writing, Vince Martin owns a bearish options position in Tesla, and has no positions in any other securities mentioned.
