Should Nio Stock Be in Your “Fun” Fund?

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Fresh off Tesla (NASDAQ:TSLA) reporting lower than expected vehicle deliveries in the first quarter, Nio (NYSE:NIO), its Chinese electric-car counterpart, got two upgrades by analysts, prompting investors to wonder if it’s time to buy Nio stock.

History Repeating: Why It May Be Time To Turn Bullish On NIO Stock

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First, let me explain what a “fun” fund is.

Any stock that has no business being held in a retirement fund because of its risk and volatility, but has an exciting business and is disrupting markets, belongs in investors’ fun fund.

Tesla’s Loss Is Nio’s Gain

I recently wrote a column about Tesla that identified Europe and China as critical drivers of Tesla stock. I further suggested that Tesla’s North American business was doing well, regardless of what the Q1 production and delivery numbers said.   

Analysts expect Tesla to report Q1 Model 3 production of 64,000. Meanwhile, Bloomberg’s Tesla tracker suggests the car maker could blow past that number, producing as many as 78,000 Model 3’s during the period,” I wrote in the column published on Apr. 4.  

“If you own TSLA stock, I wouldn’t sweat it if Tesla came in under 64,000. If it does, and the stock drops, it’s a buying opportunity. If you don’t own Tesla stock but are considering buying, buy a bit now and more later regardless of the number,” I added.

First, let me just say that I have no idea what the Bloomberg tracker was smoking. It predicted that 78,000 Model 3s would be produced in January through March; Tesla announced 62,950, 1050 shy of the consensus estimate, and well below Bloomberg’s outlook.  It also produced 14,150 Model S and Model X vehicles.

Tesla delivered 63,000 vehicles, 110% more than the first quarter of 2018, but 31% lower than Q4 of 2018. Due to its difficulties delivering vehicles to China and Europe, 10,600 got pushed into Q2, which should help boost the company’s sales this quarter.

Although I’m enthusiastic about TSLA, I finished my article by reminding readers that TSLA stock is not meant for investors’ retirement funds. Since high-risk, high-reward investments sometimes backfire, they belong in investors’ fun funds. 

I never would consider Nio stock  to be superior to Tesla stock. However, Nio’s upgrades and better-than-expected delivery numbers in its Q1, combined with  Tesla’s Q1 delivery miss, suggests that the two stocks aren’t nearly as different as investors might think. 

Tesla’s recent miss has rejuvenated  the conversation of whether Nio Inc stock also belongs in investors’ fun funds.

Signs That Nio Stock Does Belong in Fun Funds

According to the analysts at Bank of America, in Q2, Nio’s ES8 deliveries should surpass  the 3,989 level they reached in Q1. As a result of its Q2 outlook, BAC upgraded NIO stock from “underperform” to “neutral” and set a 12-month target price of $6.20 on Nio stock.

Meanwhile, over at Citigroup, analysts upped their rating on Nio to “buy” from “neutral,” while lowering their target price on NIO by 40 cents to $6.80, versus Nio stock’s current price of $5.34.

Additionally, Canaccord Genuity analyst Jed Dorsheimer lowered his price target on Tesla by $59 to $391, versus the stock’s current price of $280. Although the analyst kept a “buy “rating on Tesla stock, that’s a big price-target cut.  

Despite delivering just 6% of the vehicles that Tesla did in Q1, NIO is the belle of the ball at the moment. On two occasions since going public in September, Nio stock’s traded above $10.

Will Nio Inc stock reach that milestone for a third time in the coming weeks?

If you can afford to lose the entire bet, it’s an intriguing one from a risk/reward perspective.

Signs That Nio Inc Stock Doesn’t Belong in Fun Funds

In early March, I argued that even with Nio stock trading under $6, I wouldn’t advise anyone except the most speculative of investors to buy the shares. Are you that investor? Be honest

“Automotive experts suggest that Nio needs to make 100,000 vehicles annually to achieve economies of scale that will lead to eventual profitability. In 2018, it sold just over 10,000 — well short of the target,” I wrote in an article published on Mar. 7.

“Sure, Tesla (NASDAQ:TSLA) had to climb the same mountain, but given the pathway Musk has made for electric vehicle companies like Nio, you would think it could do better. As competition from the existing automotive manufacturers heats up, there’s a real possibility that Nio will get left behind.” I added. 

The fact of the matter is Nio lost $1.3 billion in 2018. That’s $1.81 in losses for every $1 of sales it generated. By comparison, Tesla lost 5 cents for every $1 of revenue in the past year.

I don’t know how fun your “fun” fund is, but mine doesn’t consider these losses a laughing matter. Do you think Tesla has cash flow problems? Nio can’t even get a factory built.

The Bottom Line on Nio Stock

When investors buy stocks under $10, most of the time, they’re gambling.

My InvestorPlace colleague, Luke Lango, makes some good arguments why Nio stock might be on the road to recovery. He  suggests that NIO could be trading almost 36% below its actual value.

Should Nio Inc stock go in your fun fund?

As long as you’re prepared to lose the entire investment, there are arguments to be made in Nio’s favor. However, if you’re asking me whether Nio is a better stock than Tesla, the answer is simple.

It’s not.

Tesla is the world’s leading electric-car maker by a country mile. In recent quarters, TSLA has managed to make money.  That’s not an easy task, and it’s something the owners of Nio stock can only dream about.

In addition, Tesla’s got the brilliance, determination, and resilience of Elon Musk. That alone, in my opinion, makes TSLA the better  electric-vehicle stock to own.

And a final caveat.

I definitely wouldn’t own both stocks. That would be overkill, unless you have a large fun fund that will enable you to keep the combined weighting of both stocks below 5%-10%. While the fund is meant to be fun and you’re prepared to lose your entire investment, the name of the game is to make money. 

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/04/should-nio-stock-be-in-your-fun-fund/.

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