Had Tesla (NASDAQ:TSLA) not legitimized mass-market electric vehicles here and in China, Nio (NYSE:NIO) might have never come into existence. But now that it has, the newcomer is in a position to beat Tesla at its own game… in China, and eventually, perhaps in the United States.
That may not be a core reason to step into a position in Nio stock, however. Rather, to be bullish about Nio stock, investors have to think that Nio has learned from Tesla CEO Elon Musk’s overly aggressive spending, as well as from the U.S. company’s marketing mistakes.
Nio has been called the Tesla of China, but if Nio stock is worth the risk of buying, it’s because it’s not quite China’s version of Tesla.
Nio Is Off to a Good Start
Nio was founded in 2014, though it didn’t mass-produce its first vehicle until last year. That vehicle is the seven-passenger ES8, which retails (in China) for $67,000.
That’s too expensive for most of China’s consumers. But it’s still more accessible for Chinese buyers than Tesla’s comparable vehicle. Tesla just lowered the price of its Model 3 sedans in China, but they still start at $64,000. Tesla’s more comparable SUV/crossover, the Model X, retails for well over $100,000, and the best-equipped versions cost closer to $200,000.
And so far, China’s drivers are snapping up all the ES8s that Nio makes. Nio delivered 3,318 of them in December, bringing the 2018 tally to 11,348. The ES8’s sales figures are in-line with those of Tesla’s earliest vehicles, though Nio brought its second passenger vehicle to the market much faster than Musk did. The ES6 — a smaller SUV that starts at $52,000 — debuted in December.
The two companies appear to be on parallel paths, and in many regards they are. In some ways, though, investors have to appreciate that NIO doesn’t intend to stress out its shareholders as Musk has.
While Tesla stock exploded higher in 2013 and again in 2017 on the heels of the company’s mainstreaming of EVs, since late 2017 a fiscal reality check has largely kept a lid on TSLA stock.
As it turns out, it’s neither cheap nor easy to make a whole new kind of automobile, particularly in bulk. Musk referred to his expansion headaches as “production hell.” Given Tesla’s woes, Nio’s chiefs probably aren’t even thinking about turning a profit in the near future.
Yet, beyond the superficial similarities, there are key differences. Those differences will probably be welcomed by the owners of Nio stock
Chief among the differences is the method that Nio is using to manufacture its vehicles. Whereas Musk insisted on building Tesla’s vehicles from the ground up in-house, despite little manufacturing experience to speak of, NIO has outsourced that job to its Chinese partner, JAC Motors.
But that will change in the foreseeable future. NIO is currently building a factory in Shanghai that should begin production in 2020. But beforehand, the brand will have been established and design headaches will have been ironed out by JAC, which is a well-established company.
In retrospect, it’s arguable that Musk spent as much time fixing manufacturing problems as implementing his vision. Such production problems probably won’t weigh on NIO stock as much as they hurt Tesla stock.
Nio also doesn’t intend to (or need to) perfect battery technologies, since it’s going to make battery swapping tantamount to filling up at a gasoline station. Tesla, on the other hand, had to tackle the expensive endeavor of developing batteries.
In that same vein, Nio will incur lower relative costs on multiple fronts.
One of those fronts is labor; Chinese workers earn relatively less than their western counterparts. Another area where Nio plans to curb costs is its development of self-driving technologies. It’s building cars with MobileEye’s fourth-generation EyeQ chips, which another company developed over many years and at great cost. The technology isn’t at the cutting edge of autonomy, but given the uncertainties of self-driving cars (China’s regulators are struggling with the idea just like U.S. regulators are), spending heavily on top-tier self-driving tech — as Tesla is — may not yield much of a return on investment.
In short, NIO is at least thinking about its bottom line, even if it won’t deliver net profits for years. While Musk has admittedly made amazing machines, it’s been at a cost that hasn’t been entirely justified. The discrepancy makes Nio stock more attractive now than Tesla stock was then.
The Bottom Line on Nio Stock
While Nio is in many ways the carefully-managed company that many Tesla shareholders wish Tesla was, there’s still no assurance Nio will achieve sustained profits any sooner than Tesla did… if Tesla actually has. UBS analysts Paul Gong and Yizhe Wang recently concluded that the current value of Nio stock already reflects the company’s present fiscal situation and plausible opportunities.
Handicapping EV stocks is also something of a flying-by-the-seat-of-your-pants exercise, however. Their valuations are largely driven by rhetoric rather than results, and the EV market’s backdrop is forever changing. Just like Nio is putting pressure on Tesla in China, newcomer Byton is a budding threat to Nio.
If the mere premise and promise of electric vehicles in China made Tesla stock a compelling trade just a couple of years ago, though, then Nio stock has to be at least a slightly better prospect now. And, the more cars NIO makes, the better that prospect becomes. Never even mind the fact that China’s leaders would much rather see home-grown EVs on the country’s roads.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.