Nio (NYSE:NIO) continues to fall further into penny-stock status. Once compared to American automaker Tesla (NASDAQ:TSLA) as the “Tesla of China,” Nio stock now struggles to survive.
A deal NIO has made with a government-owned organization may keep it from going to zero. However, investors should not buy at these low levels hoping it will become the next Chinese Tesla or Ford (NYSE:F).
It’s All About the Numbers
With a Nio stock price now just hovering above $2.50 per share, shares are cheap. However, there’s a reason for this extreme discount. I do not say that because I made a mistake in referring to NIO as a “possible trade” about one month ago. It also has little to do with the fact that I constantly remind traders that so-called Chinese stocks are actually Cayman Islands-based holding companies who represent Chinese firms.
For me, it comes down to numbers. Sales of its electric vehicles (EVs) fell by about 54.6% between the fourth quarter of last year and Q1. Also, the company sold only 5,113 cars in the first four months of 2019. Sales of 1,124 vehicles in April make up only a small fraction of the 45,197 EVs sold in China.
NIO faces More Competition than Tesla
Unlike Tesla in the U.S., NIO faces heavy competition at home. It lags BYD Auto (OTCMKTS:BYDDF) in sales. BYD benefits from the interest of Warren Buffett as Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) bought a 25% stake in the company 11 years ago. Yes, Nio stock may have beaten its Chinese peers to the U.S. equity markets. Still, it’s lost nearly 60% of its value from the initial public offering of $6.25 per share back in September.
Worse, conditions appear unfavorable for the entire EV sector. Tesla has lost over 40% of its value since the early summer of 2017. Moreover, investors should remember that even the largest, best-established players have not prospered.
Recall that General Motors (NYSE:GM) experienced a bankruptcy 10 years ago. Since the current GM stock launched its IPO in 2010, shares have seen little appreciation.
Nio Stock Should Survive but Do Little Else
Admittedly, Nio stock offers just enough hope to investors that someone who wants to see this as a buy will continue to do so. The trade war has hammered the Chinese economy. If negotiators come up with a face-saving way out for China, that could help NIO. Moreover, the company blew away revenue estimates in the last quarter, and losses came in 13 cents per share less than expected. One analyst even predicts that the company will turn profitable in 2021.
It also appears unlikely to fall to zero. As our own Dana Blankenhorn points out, Nio entered into a joint venture with GAC, the Chinese state car company. Blankenhorn rightly describes this as a “government bailout” as this means China will provide $1.45 billion to bolster the relationship. However, it will take more than a bailout to make Nio stock a profitable investment.
Still, the most misleading appeal may come down to false hopes. Many investors dream of buying a penny stock that stages a dramatic comeback a few years down the line. I do not necessarily discourage such speculation with a small part of one’s portfolio. However, while I expect some stocks will trade well above their current levels, autos probably won’t enjoy such robust speculation.
Final Thoughts on Nio Stock
Those hoping for outsized gains from low-priced equities will likely not profit from Nio stock. Yes, NIO operates in the same sector that has led TSLA to massive gains. However, times have changed in the EV sector and in the auto industry overall. Even Tesla stock has begun to suffer.
Yes, the investment from the Chinese state automaker could avert a bankruptcy. However, survival is not prosperity. For Nio stock to deliver outsized long-term gains, it will not only have to become profitable, but must become China’s market leader in EV. That’s something it has never done.
NIO will also have to bring long-term profits for investors. While it may turn a profit at some point, historical industry facts indicate consistent profitability is a serious challenge.
Those who want to set aside a portion of their portfolio for speculation should do so. However, I would not expect those gains to come from Nio stock or any equity in this industry.
As of this writing, Will Healy is long BRK.B stock. You can follow Will on Twitter at @HealyWriting.
