Nio Inc (NYSE:NIO), China’s luxury electric vehicle-maker frequently compared to Tesla (NASDAQ:TSLA), has had a rough year. Since the beginning of 2019, Nio stock has retreated almost 60% due to a soft Chinese economy and weak sales guidance.
Worse yet, China’s government is phasing out EV credits, and foreign EV competition in China is just beginning to increase. Because of this, many analysts believe there will be a “shakeout,” where only the strongest Chinese players survive.
While investors have thought of many reasons to sell Nio right now, you shouldn’t be too hasty. Consider these four reasons to be less bearish on Nio stock going forward:
Nio Stock Has Short-Squeeze Potential
The current sentiment around NIO is pessimistic at best. The macroeconomic picture for China is negative as its economy slows due to the U.S.-China trade war. China’s EV sector fundamentals are negative, too, as China phases out some of its EV subsidies and causes growth to decelerate sharply.
The recent recall hasn’t helped. Around 5,000 SUVs were recalled due to battery fires. This has added to Nio’s costs, creating additional uncertainty. And consider that 20% of Nio’s float is short … this means that there is some big money betting against it.
Yet, all the negative sentiment and short interest could be a positive in the short term. Here’s why:
If Nio’s shipments for next quarter are higher than expected — or if the Chinese government supports the EV sector more than expected — Nio’s stock could rally, potentially squeezing the short-sellers.
Foreign Battery Makers Are Entering China
China’s government recently opened up its electric vehicle battery sector to foreign competition, allowing the entry of leading battery makers such as Samsung and LG Chem Ltd.
The new foreign competition could cause quality EV battery costs to fall faster than expected. Considering that batteries are the largest cost-component of electric vehicles, NIO’s margins could benefit from lower battery costs.
China’s a Huge EV market
Although China’s EV market is slowing, the sector is still expected to grow long-term. This is due to China’s large population and government policies that promote clean transportation vehicles.
Automakers sold 1.3 million electric vehicles in the country in 2018, representing around 4% market share. Some analysts believe EVs could command as much as 50% market share by 2025!
If Nio can adjust its cash burn to meet demand and management executes, the stock has substantial potential.
Tencent Is an Investor
Tencent invested in Nio when it was a private company and as a result, Tencent held 5.2 million class A shares and 132 million class B shares of Nio after its initial public offering (IPO).
Considering that the social media company had $26.25 billion of cash and short-term investments on its balance sheet at the end of March, Tencent has the financial resources to invest and make a big difference in Nio’s operations if it wanted to.
Any sort of big investment by Tencent could cause Nio’s stock to surge.
As of this writing, Jay Yao did not hold a position in any of the aforementioned securities.