Investors had high hopes for Nio (NYSE:NIO) stock when it started trading following the IPO of Chinese electric-vehicle maker NIO last September. However, optimism gave way to disappointment quickly.
NIO stock price struggled to stay above the IPO price over the next six months before falling to penny-stock status in the spring.
Despite a renewed sense of optimism towards NIO, all but the most adept traders will find it challenging to profit from Nio stock.
History Bodes Poorly for NIO
Hundreds of American auto companies have come and gone. Today, only three major auto companies have a headquarters in the United States : Tesla (NASDAQ:TSLA), GM (NYSE:GM), and Ford (NYSE:F).
Moreover, investors should remember that even the largest American car companies, including Ford, have declared bankruptcy at some point in their histories. Observers can expect a similar shakeout in the Chinese auto sector.
Investors should heed these lessons as China’s auto industry grows. Given those lessons, they cannot assume that NIO will avoid bankruptcy.
Nio Faces Intense Competition and Needs Cash
Many like to call NIO the “Tesla of China.” However, in reality, numerous companies, most of whom remain privately owned, could credibly be referred to by that title. According to Bloomberg, nearly 500 companies have registered to produce electric vehicles (EV) in China. Meanwhile, NIO has less than a 2% share of China’s EV market.
Analysts expect NIO, like many other start-ups, to report losses for the foreseeable future. But Nio stock bulls point to the company’s expected revenue growth. Wall Street analysts, on average, anticipate that its top line will soar by 130% this year and 90% in 2020. Nonetheless, analysts don’t expect Nio’s earnings per share to turn positive until at least 2021.
However, Nio’s revenue growth and the belief that it will eventually be profitable have sparked optimism towards NIO stock. But its long-term prospects remain uncertain, and its losses have taken a toll.
The Nio stock price closed yesterday at $3.05, 70 cents above its 42-week low. But NIO has suffered in recent months. After Nio stock price surged to an intraday high of $4 per share in March, I urged investors to treat the rally as a “dead cat bounce,” and that’s what it turned out to be.
In Vince Martin’s critique of NIO, he states that the company needs money. Martin speculated that the company could run out of fundsby the end of the year. He also rightly stated that Beijing’s decision to reduce electric-car subsidies could take a further toll on NIO.
Who Can Profit From Nio Stock?
Like most penny stocks with significant revenue growth, NIO stock could potentially be profitable for speculative traders. NIO has an advantage because it’s one of the few emerging Chinese EV companies that trade publicly. Moreover,trading around $3 per share, Nio stock could be appealing to traders who remember the move by Nio stock price to $4 per share last month.
Still, at best, I believe Nio stock should be a short-term position rather than an investment. With all of the Chinese EV companies and more and more global firms starting to sell EVs in China, investors should worry about Nio’s competition.
Further, largely due to traffic concerns, officials have at times limited new vehicle sales, particularly in the country’s largest cities. Chinese cities have eased those restrictions (for now) amid slowing vehicle sales. However, NIO sold only 837 vehicles in July.
When I look at Nio, I see modest sales, losses, and intense competition. Furthermore, even the most established automakers have always had trouble making profits. That has not changed, and it will probably lead to a massive consolidation of China’s auto industry.
The bottom line is that Nio’s ability to survive over the long-term remains uncertain at best. Under those conditions, profiting from Nio stock will probably be quite challenging.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
