The Bull Thesis on NIO Stock Is Not Great, but It’s Improving

NIO stock - The Bull Thesis on NIO Stock Is Not Great, but It’s Improving

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While tech stocks have largely dropped into correction territory over the past two months, Chinese electric vehicle (EV) maker NIO (NYSE:NIO) has gone in the opposite direction. The Nasdaq has dropped 12% since early October. During that stretch, NIO stock is up 14%.

Why? Because one of the biggest headwinds affecting broader tech stocks (the threat of bigger tariffs) is actually a benefit for NIO. The logic is pretty straight forward. The more tariffs the U.S. and China implement on one another, the more consumers turn to products and goods that are produced domestically.

A Look at NIO

A large chunk of NIO’s competition in China produces vehicles outside of China, including main competitor Tesla (NASDAQ:TSLA). NIO produces its vehicles in China. As such, bigger tariffs push Chinese consumers away from Tesla and other non-Chinese EVs, and towards NIO.

This trend was confirmed in a recent report by Reuters. Citing China’s passenger car association, Reuters reported that Tesla vehicle sales in China sank 70% in October. Meanwhile, total EV sales in China rose 85% year-over-year during October. Thus, while the EV trend remains red-hot in China, Tesla does not, and that is a positive development for NIO stock.

Having said that, that doesn’t mean it is time to buy NIO stock just yet. While near term trends are improving, the medium to long term outlook on NIO remains unclear at this point in time.

This company could one day be huge, and management is taking the right steps to ensure a brighter future. But, there are plenty of competition risks which cloud the long term bull thesis and ultimately make NIO stock too risky to own at the current moment.

Near Term Trends Are Improving

Near term trends supporting NIO stock gradually have improved over the past few months, and will likely continue to improve for the foreseeable future.

The biggest near term improvement here is on the tariffs front. It doesn’t look like trade relations are going to improve anytime soon between the U.S. and China.

If anything, it has become increasingly clear that both companies are willing to play the long game, and that trade relations will get worse before they get better. That means bigger tariffs, which in turn means higher demand in China for domestically produced products and goods.

That is a big positive development for NIO. Tesla doesn’t manufacture vehicles in China, and as such, is being hurt by these higher tariffs. Granted, Tesla has plans in place for a Shanghai factory which will allow the company to side-step the tariff headwind, but this factory isn’t up and running yet.

NIO’s production lines in China are up and running. As such, so long as Tesla’s Shanghai production factory remains idle and tariffs stay in place, NIO has an opportunity to gain an early lead on Tesla in the luxury EV market.

Another near term improvement is NIO developing more deeply into a lifestyle brand. Taking cues from Tesla, NIO has worked hard to brand itself as much more than a car company. For example, NIO’s pop-up retail shops are “swanky clubhouses” and the company also recently launched a luxury apparel line.

These are positive developments for NIO stock in that they create greater brand awareness, loyalty, and demand.

Lastly, the EV market in China remains as hot as ever. Sales of EVs in October rose a whopping 85%, after 66% growth in September. More importantly, NIO is the best selling luxury SUV in this market, affirming that this company is potentially in the early stages of a Tesla-like growth trajectory.

Long Term Risks Remain Large

Despite near term improvements, NIO remains plagued by long term risks.

Through one lens, the long term Tesla comparison is quite compelling. NIO is a premium electric vehicle manufacturer that, for all intents and purposes, is doing exactly what Tesla did six years ago by coming to market with a high-end EV.

The numbers imply that NIO is doing better today ramping operations than Tesla did six years ago. In the first six months of deliveries in 2012, Tesla delivered 2,600 Model S vehicles. In the first six months of deliveries in 2018, NIO expects to deliver 10,000 ES8 vehicles.

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.

But, if you contextualize early stage production and delivery numbers for Tesla and NIO, the comparison becomes much less bullish. Back in 2012, the EV market was taking its first steps. The total volume of new EV sales in 2012 summed to less than 120,000 cars.

Today, that number is in excess of 1 million vehicles. Moreover, Tesla’s 2,600 Model S deliveries in 2012 came against the backdrop of 53,000 EV sales in America, so it represented about 5% share. NIO’s 10,000 target deliveries in 2018 comes against the backdrop of presumably more than 600,000 EV sales in China, implying less than 2% share.

Also, NIO doesn’t even crack the top 20 yet in terms of top selling EVs in China. Meanwhile, Tesla is the undisputed leader in America. Beyond the delivery numbers, back when Tesla was delivering 5,000 to 7,000 cars a quarter in late 2013, revenues were running around $2 billion, gross margins were up at 25%, and the company was profitable on an adjusted basis.

Today, NIO projects to have a 6,500-plus delivery quarter this quarter, and revenues are just $800 million on an annualized basis, gross margins are negative and losses are wide.

Overall, there are still a ton of competition and profitability risks when it comes to NIO stock. As such, despite near term improvements, the long term growth trajectory for this stock remains unclear.

Bottom Line on NIO Stock

NIO stock is potentially a huge long term winner. But, at this point in time, there are plenty of risks to the upside scenario, and those risks will ultimately keep a cap on this stock in the near to medium terms.

As of this writing, Luke Lango was long TSLA.

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