Tesla (NASDAQ:TSLA) has been one of the hottest stocks of recent years, despite Elon Musk’s propensity for wild statements, and everyone knows that China is a land of myriad investment opportunities. So a company that can hype itself as “the Tesla of China” was always going to get a lot of publicity, which is why people are talking about Nio (NYSE:NIO) stock.
Nio is the leading maker of electric cars in China. With apocalyptic news about climate change coming out all the time, the trend toward automobiles that do not consume fossil fuels will only get stronger. NIO, which benefits from considerable support from China’s government, has established a strong foothold in its home market.
But is it ready to conquer the world? NIO stock has slipped by about 42% since Sept. 14. While the company’s long-term prospects may be bright, in the short to intermediate term only the most risk-tolerant investors should buy NIO stock.
The company’s leading product, the ES8, is a seven-seat, high-performance SUV. Its price in China is less than half that of Tesla’s most comparable offering, the Model X SUV. Unsurprisingly, Nio has been able to gain significant market share in China. Meanwhile, NIO has put its increased cash flow to good use, opening a major new factory in Shanghai.
The firm is planning to launch its second vehicle, the five-seat ES6 premium SUV, in June or July of 2019.
The Market Challenges Facing NIO Stock
But the electric car market has changed quite a bit in the last six years. When Tesla first came on the scene, the technology was relatively new and the market was wide open. Now Tesla has established a powerful brand name, and existing car makers such as Mercedes and Audi have made strong inroads into the market as well.
Tesla’s experience has enabled it to maintain certain advantages over upstart rivals like Nio.
Tesla’s Model X has an EPA range of 335 miles, while the EPA range of Nio’s ES8 is 154 miles (EPA range is an estimate of the number of miles an electric vehicle should be able to travel on a full charge.) Range is more of a factor in the U.S. market than in China, where vehicles are likely to be used for shorter trips.
Tesla stock, of course, has posted enormous gains for its investors over the last six years, even if Tesla stock has had more of a roller coaster ride in recent months. But given the fact that NIO stock is facing much greater competition than Tesla stock did at the same point in its history, it will be very hard for Nio to match the gains of Tesla stock, even if China’s economic growth matches or exceeds expectations.
As things stand now, NIO stock is an ultra-high-risk investment, although its potential rewards are also high. More cautious investors should keep an eye on the firm and see whether it can successfully develop multiple types of vehicles and effectively sell them outside of the company’s home market.
As of this writing, the author did not own any of the stocks mentioned in this article.