Chinese electric vehicle company Nio (NYSE:NIO) has described itself as the Tesla (NASDAQ:TSLA) killer. Since the company’s U.S. initial public offering last year, NIO stock hasn’t exactly knocked Tesla off the pedestal just yet. But a recent 60 Minutes feature is giving Nio a huge new burst of attention.
If Nio is to become a Tesla-killer, it needs a ton of media spotlight. Undoubtedly, Tesla wouldn’t have ever reached its heights, either as a stock or a pop culture phenomenon, without the media’s unrelenting coverage of Elon Musk. Tesla has become a classic story stock where the vision has run far ahead of its financial success, at least to date.
Now Nio is offering investors a similar compelling story. Let’s take a look.
An Electric Car Lifestyle
Nio doesn’t disguise its ambitions. In its interview with 60 Minutes, founder William Li said that Nio isn’t really a car company but instead views itself as a lifestyle company. That’s certainly a wise strategy for building a brand. A company like Apple (NASDAQ:AAPL) has dominated in tech hardware — a sector which features notoriously fickle consumers — because the Mac maker is selling much more than just a phone or tablet. It is selling an image which allows consumers to feel like they are part of a better and more enlightened part of society. Similarly, Starbucks (NASDAQ:SBUX) brewed success by generating an enticing feeling for its customers, even if its coffee doesn’t taste particularly better than the competition.
So what’s Nio’s strategy to become more than just another car manufacturer in a crowded field? The Shanghai-based company offers some features, such as an exclusive app and social network that only Nio owners are a part of.
More interestingly, Nio is building members-only clubs on top of their dealerships. These are called Nio Houses. They are intended to give younger Chinese consumers access to a more pampered lifestyle. Benefits include classes in things such as espresso making, along with places for kids to play, and areas for folks to hang out and make friends with each other. As an American, it’s hard to judge how well this concept will catch on in China.
However, private clubs — such as those based around golf courses — have a long history of promoting social bonds within upper-class communities and charging dearly for the experience. Given China’s incredibly dense urbanization, a traditional community club approach would probably not work so well given the shortage of land. So perhaps something like the Nio House will be the right concept in its place.
How Will Nio Pay For This?
Like with Tesla, Nio will face challenges trying to turn vision into reality. They are anticipating only selling something in the neighborhood of 40,000 cars this year. It’d be hard to generate much profit at that level of scale even if the company had modest overhead. Instead, it is locating in some of the most expensive real estate in Beijing, Shanghai, and other Tier 1 cities for its Nio Houses. Costs to operate this sort of model will be high.
Now you can say that the Nio Houses essentially serve as marketing for the vehicles, and they’ll make back their costs and more with car sales. But it will take a lot more than 40,000 vehicles a year to reach a strong financial state.
It’s also worth remembering that the Chinese auto market is brutally competitive. Just within Chinese electric vehicles, you have leaders like BYD Company (OTCMKTS:BYDDF) which is backed by Berkshire Hathaway (NYSE:BRK.B). And that’s to say nothing of all the competition coming from traditional automakers and Tesla. You should also consider that even with China’s new prosperity, the country’s GDP per capita is still less than $10,000. This suggests that China’s market for Nio’s $60,000 vehicle is likely far smaller than for Tesla and other luxury EVs in the United States.
At this point, Nio has a little more than $1 billion in cash, however it is burning through something like $300 million of that stockpile with each successive quarter. Do the math, and you’ll see that Nio will need more money. The IPO gave it some funds, but they’ll need plenty more. Remember that Nio doesn’t do their own manufacturing at this point, instead it contracts out. Presumably, assuming they keep ramping up, they’ll eventually need to build out their own factories, which will require yet more capital.
NIO Stock Verdict
While Tesla has been able to avoid as much dilution as its critics feared by using the debt market, I doubt this avenue will be so easily available to Nio, at least at this stage in its growth story. Instead, that means that they will likely need to issue more NIO stock, and lots of it, to keep funding the growth story.
With NIO stock up more than 30% since early December, look for a serious round of selling coming up. For one thing, the stock lock-up from the initial IPO expires March 11. That will be one catalyst that should lead to this rally breaking down. Nio’s market cap is already closing in on $8 billion for a company. That’s a huge number for a company with such a small sales base that is losing tons of money.
If you bought into NIO stock before the 60 Minutes story, congratulations. This is the time to take some profits. You will probably be able to buy Nio shares back at $7 or $8 again in a few weeks once people forget about this round of publicity.
At the time of this writing, Ian Bezek owned BRK.B stock. You can reach him on Twitter at @irbezek.