While Tesla (NASDAQ:TSLA) stock has sputtered out of control due to a now-infamous tweet about going private, an unusual SEC lawsuit, and persistent questions regarding near-term profitability, there has been a lot of hype surrounding China’s version of Tesla, NIO (NYSE:NIO).
NIO is a premium electric vehicle, or EV, manufacturer that is based in China. For all intents and purposes, NIO is trying to emulate Tesla, since NIO is focused on building high-end electric vehicles. Sticking with this comparison, NIO is where Tesla was roughly six years ago, when TSLA was just starting to deliver its Model S vehicles to its customers. NIO’s first volume production car, the ES8, was delivered to its customers for the first time in June.
NIO bulls will point to how far Tesla stock has come since then. Back in 2012, Tesla was a $30 stock. Today it is a $300 stock. That is a ten-fold increase in six years. If the same thing happens to NIO stock, you are looking at an $80 stock in six years, versus $8 today.
Bears don’t buy that comparison. They point out that Tesla had a true first-mover advantage in 2012, whereas NIO is entering the EV market at a time when it’s more crowded and competitive than ever. They also point to the fact that before the Model S, Tesla had the Roadster, which was generating revenue and positive gross profits. NIO has the EP9, a high-performance EV sports car, but it’s selling very few EP9 cars. Meanwhile, NIO stock has a market cap of $8.3 billion. When deliveries of the Model S began to ramp, Tesla stock had a market cap of $3.5 billion.
Are the bulls on NIO stock correct or are the bears right?
Long-term, I’m inclined to believe that the bulls are correct. But the bears make some good points, and the near-term risks of NIO stock are high. Thus, NIO stock is a wait-and-see situation which will require patience.
The Bull Thesis Is Compelling
The long-term bull thesis on NIO looks compelling from a fundamental standpoint.
If you look at the numbers, NIO is doing with the ES8 what Tesla did with the Model S six years ago. NIO is just doing it better and faster. Deliveries for the Model S started in June 2012, while deliveries of the ES8 started in June 2018. In the first six months of its deliveries in 2012, Tesla delivered 2,600 Model S vehicles. NIO has already surpassed that number and expects to deliver 10,000 ES8 vehicles by the end of the year.
Moreover, and perhaps more importantly, Tesla had 12,200 Model S reservations shortly after it began delivering the vehicles. NIO now has 15,800 ES8 reservations.
In other words, NIO is on the same growth trajectory as Tesla, but is moving faster. If that trend continues, NIO stock could be a multi-bagger.
Some of this enthusiasm should be tapered back. NIO is not the next Tesla because Tesla has already established a global brand that will help it combat competition, and it had no competition in its early stages. Meanwhile, NIO is trying to create a brand in a hyper-competitive EV market. That is a tall-order. Early indications from reservation numbers indicate NIO can do it, but this company has a very low chance of ever rivaling Tesla’s EV market share.
But there are reasons to be upbeat about NIO. Its reservation numbers are strong, while its production and deliveries are ramping nicely. It has new cars in the pipeline. In other words, the company does look like Tesla did in its early stages, and could become a giant automotive company in the future. Pretty much all major auto companies have a market cap of over $35 billion. NIO has a market cap of just $8 billion today. Thus, NIO stock could become a multi-bagger within the next decade.
Patience Is Important
While NIO stock offers tremendous upside potential over the long-term, there also many things that have to happen in order for the company to realize that potential. At this early stage, it is simply too hard to predict whether or not those things will happen.
Tesla going from where it was in 2012 to where it is today was nothing short of a miracle. Time and time again, it solved production and delivery problems. At the same time, it somehow maintained sky-high brand status and was able to show a profit a few times, keeping the bears at bay.
Will NIO be able to match that performance? It’s tough to tell. The operating environment is way different now than it was when Tesla became prominent. Back then, the EV market was nascent and did not have a giant. Today the EV market is more mature, has a giant in Tesla, and is more crowded than ever. As a result, NIO’s path will be much more difficult than Tesla’s was.
That isn’t to say that NIO won’t be able to become the Tesla of China. It might able to, but it faces high risks.
Thus, investors should be patient when it comes to NIO stock. There’s no need to rush into NIO stock when it’s valued at $8 billion and the company has less than 16,000 orders. Wait to see how demand, production, and deliveries play out over the course of several quarters. See if NIO’s upcoming products make equally big splashes. Then, decide whether NIO has a chance to morph into the Tesla of China.
Bottom Line on NIO Stock
NIO stock has a promising, long-term growth outlook. But it’s unclear at the moment whether NIO stock can reach a valuation of $30 billion-plus. As such, the “wait-and-see” approach is the best game plan for NIO stock here.
As of this writing, Luke Lango was long TSLA.