InvestorPlace readers may know that I’m not the biggest fan of Chinese stocks. Although in certain cases this segment provides upside, more often than not, the longer-term picture remains questionable. Such is the case with Chinese electric-vehicle manufacturer Nio (NYSE:NIO). Within a half-year period, NIO stock rudely transitioned from Wall Street heartthrob to persona non grata.
Earlier this year, I took a negative view on NIO, juxtaposing its introduction with the now-defunct DeLorean Motor Company. Both companies produced visually stunning cars designed to appeal to the mass consumer market. However, both upstarts suffered credibility issues that eventually reached the bottom line. Things got so bad for DeLorean that the brand and the man behind it fell ignominiously from grace. At least his car was immortalized by Hollywood.
Admittedly, that sounds like a “click-baity” thing to say. As our own Tom Taulli mentioned, China enjoys the largest EV market in the world. Plus, this segment has grown impressively in recent years.
Yet Taulli remains cautious on Nio stock for good reason: mere size doesn’t directly translate to higher performance. Otherwise, Michigan would always win the national championship.
Put another way, NIO isn’t taking advantage of its home market. Since June 2018, the company sold 15,000 units of its flagship ES8 SUV, according to Quartz contributor Echo Huang. However, that’s only 1% of China’s EV sales. Seems like NIO has lost the EV roadmap.
So while EV may be robust in China, NIO isn’t eating much of that pie. That hurts the longer-term outlook for the Nio stock price. But another factor, science, can kill it.
EVs Are the Future … of the Future
When you watch as much YouTube as I do, you come across some conspiracy theories. One of my favorites is this: J.P. Morgan — the man, not the bank — secretly knew that EVs were inherently superior to steam and fossil-fuel alternatives. However, he wanted to profit from the scarcity fear. Thus was born the petroleum-fueled cars we mostly enjoy today.
But like most conspiracies, sound and reasonable explanations exist, too. In this case, the combustion engine probably won out because it was the most effective platform in most circumstances. Subsequently, this is a history lesson that might sting the Nio stock price.
I say that because it’s already hurting Tesla (NASDAQ:TSLA). Back when I was bullish on TSLA, I praised the company for developing great-looking cars that ran on electricity. On the other hand, Toyota’s (NYSE:TM) Prius is just sad.
But that’s just one superficial component that Tesla addressed. It’s most important contribution to EVs is range. That assuaged consumer fears and many jumped on board.
However, these same drivers are coming across another underappreciated problem. You see, EV batteries have tight thermal tolerances for peak performance, typically between 60 to 80 degrees; in other words, San Diego weather.
For you poor souls who don’t live in San Diego, you’re going to suffer inefficient batteries that take longer to charge during the winter. In some states, that means your Tesla will be somewhat useless for a quarter of the year.
Tesla owners are finding this and other temperature-related inconveniences out the hard way. So, too, will NIO owners, and that’s why I’m not big on NIO stock.
Bear in mind that many parts of China experience bitterly cold winters. Once word spreads about EV inefficiencies, the negativity will cut the practical market for NIO stock.
Cost Structure Doesn’t Work for Nio Stock
Tesla and EV bulls will counter my pessimism, stating that scientists are working on longer-term solutions for temperature-sensitive batteries. Right now, serious research is occurring to develop solid-state batteries. These don’t have liquid inside, so they’re much more adaptable to outside conditions.
Great. We still have two problems. First, this research is very much laboratory research. Therefore, we might have to wait a decade before companies implement them in the automotive market. Second, and more importantly, how much will a solid-state battery going to cost?
I’m no expert but I’m guessing quite a bit. This segues into the terrible financial situation for NIO. The company is stretched widely, essentially requiring a government bailout. Still, here’s the ugly reality. Even if NIO fixed their internal dilemmas, they must address scientific challenges.
As things currently stand, EVs are desirable prima donnas. They save the environment, but they’re expensive and inconsistent anywhere but San Diego. Obviously, NIO can eventually address this challenge with solid-state batteries. But then they have to raise the price of their cars and kill margins which are already on life support.
To sum up, NIO stock has internal and industrial headwinds. We haven’t even talked about the damage to China that the trade war will inflict. From all angles, this just looks like a losing bet.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.