[Editor’s note: A previous version of this story incorrectly cited Nio’s shares outstanding as 31mm. It has since been corrected.]
Nio (NASDAQ:NIO) is often called the “Tesla (NASDAQ:TSLA) of China,” but NIO has a different focus, so NIO stock is a different type of investment.
While TSLA is focused on the problems of mass production and is aiming to enter the mid-market with its Model 3, Nio is targeting its country’s high-end, the “Young Emperors” who are ready to party after their parents rose out of poverty.
Nio calls its dealerships “Nio Houses” and aims to make itself a clubhouse, or destination, for China’s young, hip and wealthy.
After blasting Tesla stock for years, short-selling advocate Andrew Left of Citron Research sent NIO stock rising by loudly praising the Chinese company recently. However a detailed look at his piece shows he’s not so much telling investors to buy NIO stock as urging them not to short it.
Different Buyers Than TSLA
Citron sent reporters to China to interview buyers of Nio’s vehicles.
The buyers whom Citron interviewed were in their early 30s and their maximum annual salary was 300,000 yuan per year, which translates to under $45,000. The price of a Nio when it was introduced last year was about $67,000, so these buyers will have difficulty affording the vehicles.
Tesla buyers, by contrast, tend to make over $150,000 per year and have an average age of 53. Tesla’s cars are for people who are spending their kids’ inheritance, while Nio is catering to kids who are pre-spending the money they intend to inherit from their parents.
As with TSLA, don’t even look at Nio’s financials if you’re a bull. Nio is still burning cash at a ferocious rate. NIO reported revenue of $214 million for the third quarter and a loss from operations of $409 million. Unlike companies such as Alibaba Group Holding (NASDAQ:BABA), which went public to cash out, NIO went public to get operating capital.
Don’t Short NIO Stock
I agree with Citron that you would be foolish to short NIO stock. You can only win $8 per share, and your potential losses are theoretically unlimited. There are 769.48million shares outstanding, and the market cap is under $8 billion.
Another reason not to short NIO stock is Tencent Holdings (OTCMKTS:TCEHY), the giant Chinese Internet and gaming company which has a market cap of $380 billion.
Tencent reportedly holds 21.5% of NIO stock through various subsidiaries and understands the risks and potential of NIO better than you or I ever will. Tencent can be expected to support NIO going forward.
After shipping just over 1,600 of its ES8 vehicles, and obtaining deposits for 16,000 more, Nio is a mini-Tesla. But NIO is saving money by leasing capacity at state-owned plant JAC Motors, instead of owning a factory. JAC reportedly has a capacity of 138,000 vehicles per year.
The Bottom Line on NIO Stock
InvestorPlace’s Luke Lango wrote recently that investors should wait for more clarity before investing in NIO.
I’d go further. Don’t invest in Nio at all.
Instead, consider speculating on it. If you believe in China, if you, like the average Nio buyer, are in your 30s and have money to burn, then speculating on NIO stock might make sense. This company has big-time backers and big-time dreams.
The biggest risk for Nio in the short-term is a global recession that could turn its buyers’ caviar dreams into cat-food nightmares. I’ll be cheering on NIO investors from the sidelines.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.