Don’t get me wrong. I’ll be the first to concede Tesla (NASDAQ:TSLA) mainstreamed electric vehicles. I’m also cheering startup rival Nio (NYSE:NIO), just because more competition is good for consumers, and the EV movement.
But, I don’t own TSLA or NIO stock, and for good reason. I’m one of those strange people who likes my investments to be stocks of companies that are reliably profitable, or at least meaningfully moving in that direction.
Loyal fans and followers will argue that description more or less fits Tesla here. Nio, not so much.
That’s fine. There’s some truth to the idea, too. It’s a back-and-forth affair, but Tesla has flirted with GAAP income. There’s a light at the end of the tunnel, so to speak. With the indirect backing of the Beijing government, Nio’s a survivor as well.
If you ever imagined newly minted shares of NIO would immediately reproduce the gains it took years for Tesla shares to muster, however, then your initial losses are on you.
Wishful Thinking
After 20 years in this business, I’ve seen it hundreds of times … investors generally try to use a disciplined approach when picking stocks, but every now and again fear, greed, undisciplined enthusiasm and potential regret get the better of them.
Far more often than not, such an error turns into trouble.
It’s not as if we’ve not seen it happen plenty just recently. Case(s) in point? Fitbit (NYSE:FIT), for one.
“Wearables” was a huge buzzword in 2015, when Fitbit stock first began trading, not too long after its wrist-worn fitness trackers hit the market. If you weren’t investing in wearables, the financial media implied, you were missing out on an enormous opportunity. Early consensus targets of $57 seemed within reach, particularly given the stock’s bullish post-IPO jolt.
Today, trading at only $4.44, FIT stock is about a fifth of its IPO price. It never made it to $57.
Snap (NYSE:SNAP) is an even closer-to-home parallel. It was positioned before its public offering in early 2017 as the next Facebook (NASDAQ:FB), ergo capable of putting up Facebook-like returns.
And, it may well be able to eventually do that. As of right now, however, even with the near-200% gain from December’s lows, SNAP stock remains under its IPO price.
Investors bought into the premise of being “the next Facebook,” without ever really digging into the plausible promise of doing so.
Nio’s No Tesla … Yet
If we’re being intellectually honest with ourselves, this is exactly what made Nio stock such a compelling prospect headed into its September IPO.
Tesla has turned into a winning stock, even if the company remains wobbly. Surely a rival that learned from Tesla’s mistakes would fare even better, and even more so when aimed at China’s consumers who wouldn’t ultimately foot the bill for newly imposed tariffs.
The reality of the EV business didn’t sink in until afterwards, however, with that first pesky quarterly report as a publicly traded company. As it turns out, Nio is losing money. Deliveries of the Nio ES8, at 3,989 and counting, are nowhere near Tesla’s volume. Odds are that the Chinese company will remain in the red for a while, just as Tesla did in its infancy.
End result? The current Nio stock price of $2.55 is now less than half of the $6.25 per share IPO price.
It’s a setback that somehow didn’t seem possible just a few months ago. Even famed short-seller and perennial panner of companies, Citron Research’s Andrew Left suggested in November that Nio shares could rally to as much as $12 because Nio was “not just a car company,” but “a lifestyle and a brand that is ready to disrupt.” While it’s arguable his thesis was the most extreme, Left was far from the only optimist.
Plenty of investors were more than willing to buy into those well-polished sales pitches. They wanted to believe.
Looking Ahead for NIO Stock
It’s called willful blindness, by the way — a term used by psychologists as well as lawyers to describe a proactive effort to ignore facts we don’t like. In this case, investors opted to ignore the reality that starting an EV company is expensive and difficult.
None of this is to suggest Nio stock will never rebound. It might. Indeed, it probably will. Snap did. Facebook more than dug its way out of its post-IPO hole as well. Besides, electric vehicles are undoubtedly the future. Somebody has to make them. Tesla won’t be allowed to corner the entire market.
It’s a sweeping evolution that’s understandably excited investors.
The inevitable future doesn’t necessarily pay the bills in the present, however … a reality that suddenly mattered between September of last year and just a few weeks ago.
Lesson learned.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.
