As far as newly minted stocks go, China’s electric car maker Nio (NYSE:NIO) is off to a miserable start. Nio stock, currently trading near $4.00, is now down more than 30% from its September IPO price. Perhaps the startup isn’t the next Tesla (NASDAQ:TSLA) after all.
Or maybe it is — and investors only now remember one doesn’t simply turn a multi-billion dollar enterprise into a profitable success overnight.
That is actually the case here, to be clear. As we’ve seen far too often within just the past several months, investors are willing to dive head-first into a euphoric initial public offering based on a story, ignoring the fact that it’s a sales pitch. Only afterwards do those pesky fundamentals start to matter, deflating puffed-up public offerings. Nio is the real deal, though. Even analysts expect big things soon.
The period between the public offering and validation, however, could be a rough one.
Been There, Done That
More than a few recent public offerings have turned out punitive for early believers.
GoPro (NASDAQ:GPRO), for instance, now trades 70% lower than its 2014 IPO price. As it turns out, nobody disputes the company makes the world’s best action cameras. It just so happens that most consumers don’t care to own one.
Snap (NYSE:SNAP) is presently valued about one-third less than its public-offering price (and 60% less than its post-IPO high) not because it’s a poor social networking platform, but simply because consumers don’t need another one other than Facebook.
Demand or marketability aren’t the problem here, however. Electric carmaker Nio is, more than anything else, a name that went public too soon.
Founded in 2014 and initially owned by Tencent Holdings (OTCMKTS:TCEHY), Hillhouse Capital and founder and CEO Bin Li just to name a few, the company was largely designed to recreate what Tesla had done to date — but do it better, and do it in China. While at the time of its September IPO, it had only made a few hundred vehicles, by the end of last year the company made almost 13,000 of its one-and-only ES8. The company clearly did something productive with the $1 billion it raised in that initial round of fund-raising.
Nio and the early buyers of Nio stock still learned a quick lesson the hard way, however. That is, its vehicles may be just as marketable as Tesla’s, and nobody doubts the company can scale up (existing automaker JAC, in fact, has agreed to manufacture all the Nio-branded EVs the company wants), but Tesla had something back in 2010 that Nio didn’t have last year — something new (at the time) to tout that made a lot of sense (electric vehicles), addressing a market that nobody else was competing in (at the time), and making a pitch nobody else could make at the time.
What Nio should have done is demonstrate a clear path to profitability first, and then asked for more money, positioning itself as the un-Tesla. With nothing new or novel to excite them, investors quickly lost interest.
Welcome to the game.
Looking Ahead for Nio Stock
Nio may still lack the scale Tesla has at this time, but Nio is being built from the ground up to become and remain profitable. Indeed, it’s being careful almost to fault. It’s still unclear that’s the case for Tesla, which would be a great talking point that so far’s been underutilized.
And for what it’s worth, given China’s aim of becoming the world leader in electric vehicles, it would be naive to think Nio isn’t going to get all the help it needs as well to become a global alternative to Tesla… here, there, and everywhere else. Rival BYD, which is technically the world’s biggest EV maker, certainly gets such support.
It’s just not going to all fall in place tomorrow.
It may start to happen in earnest next year, though, and even more so the year after that.
Analysts — analysts in the U.S. — forecast a top line of $720 million this year, which will grow to $2.2 billion next year, and continue to grow at this clip into 2021. By 2022, Nio should be in the black.
They’re just guesses, to be fair, but they’re guesses from professionals that get paid to keep their finger on the pulse of their respective markets and look past the near-term noise. As a group, they’re usually in the ballpark.
Bottom Line on NIO
The trick, as previously noted, is getting through the volatile period between now and then.
Don’t sweat it if you’re kicking the proverbial tires and struggling to find anything to get excited about. The chart’s current action isn’t a reflection of the company, nor is the rhetoric surrounding it, but it’s rough all the same. There’s still a myriad of the usual post-IPO kinks to work out. Fair or not, traders are still in control of Nio stock, and without any clear-cut bullish history to tout — the result of going public a tad too early — there simply aren’t enough fans and followers on the same page to change the current direction of the Nio stock price.
This is just part of that clumsy transition from being a new stock to an established company. Not unlike one’s teenage years, they’re going to be awkward.
Give it time, though. It’ll turn out fine. Remember, Facebook (NASDAQ:FB) was a train wreck coming out of its 2012 IPO, getting more than chopped in half within a few months. Five years later, it’s up nearly 500% from its public-offering value.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.