One of the main attractions of NIO (NYSE:NIO) is that it is generally considered the Tesla (NASDAQ:TSLA) of China. Yet this may rapidly be turning into a major negative trait for NIO.
Of course, Tesla stock has been in a tailspin, as its sales have plunged, and TSLA will likely have to raise more capital. There are also ongoing concerns about the leadership of Elon Musk.
As for NIO stock, it has been on a similar bearish trajectory, although its decline has been more intense than that of Tesla stock. Since February, NIO stock has tumbled from $10 to $4.80. Consider that NIO is now below its Sept. 2018 IPO price, which was $6.26. NIO stock has struggled despite the fact that Chinese stocks, including Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD). have done particularly well lately
One of the reasons for the poor performance of NIO stock was its awful fourth-quarter earnings report, which came out in early March. NIO reported a loss of $509.5 million or 49 cents per share. Analysts’ consensus estimate was 32 cents per share.
The company’s outlook was also disappointing, as its deliveries are expected to be light in the first half of this year. Partially explaining NIO’s struggles, the Chinese economy has been sluggish and the Lunar New Year holiday adversely impacted its business. Additionally, the Chinese government has slashed subsidies for electric vehicles (some of the cuts were as much as 75%).
This policy, though, does make sense. The Chinese government wants a more streamlined regulatory structure as well as a level playing field, which should encourage more innovation. The changes may also be connected to reforms related to the eagerly awaited U.S.-China trade deal.
The Outlook of NIO Stock Isn’t All Bad
For the most part, strong, non-cyclical, positive drivers continue to be present in China. Keep in mind that the number of middle-class people in China is expected to hit 780 million within six years.
Adoption of EVs has also been brisk in China, and that trend should continue over the long-term. China is the largest market for electric vehicles, and sales of EVs jumped 62% in 2018. The government wants EVs to be about 20% of China’s total car sales by 2025.
Yet perhaps the biggest catalyst for Nio stock is its ES6 crossover SUV, which is expected to hit the market in a month or so. Th ES6 is a five-seater that can go from zero to 100 kilometers an hour in 4.7 seconds, and its range is 510 kilometers. So far, it looks like pre-orders of the vehicle are robust.
The Bottom Line on NIO Stock
In the near-term, NIO stock could easily rally. The fact is that investors’ sentiment towards NIO is downright terrible. But the launch of the ES6 should spark interest in NIO and spur growth in the second half of the year.
But given the extreme volatility of NIO, it is probably best to not hold onto NIO stock for long. After all, the company will likely need to carry out another capital raise.
In other words, I’d look at NIO stock as a name to trade, but I wouldn’t buy it as a long-term investment.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
