If you own stock in Chinese electric-car maker Nio (NYSE:NIO), the news that the company’s deliveries fell by 38% in July should not discourage you, at least not yet.
After all, if Elon Musk had given up after every setback, there would be no Tesla (NASDAQ:TSLA). A stock that goes from $10 to $100 over five years doesn’t go straight up. The same is true for manufacturers looking to grow. Peaks and valleys are the norm.
Now that Nio’s delivery numbers for July are in the books, it’s time to look ahead to August and beyond. Does NIO have enough gas in the tank (metaphorically speaking) to keep moving the needle higher?
That’s the million-dollar question.
Here are three things that will help determine whether or not Nio stock is worth holding for the next 6-12 months.
The Battery Recall Hurt Nio Stock
In July, NIO delivered 837 vehicles, of which 673 were the five-seater ES6, and 164 were the 7-seater ES8. It has now delivered a total of 19,727 vehicles in its brief history, 8,379 of which were delivered in 2019.
As a result of a voluntary battery recall on 4,803 ES8s, NIO focused on its battery-manufacturing capacity in July, which caused it to produce and deliver fewer cars. Also, because some electric-vehicle subsidies ended at the end of June, some vehicle deliveries were pushed forward into June, lowering the numbers for July.
And to top things off, China’s economy has slowed dramatically over the past year. Overall passenger vehicle sales in China have declined year-over-year in 13 of the last 14 months.
So, despite several issues working against Nio in July, it still managed to deliver 837 vehicles.
August Is Expected to Be Stronger
The good news is that NIO got the battery recall completed in half the time expected, leaving more time for producing cars and getting them delivered to its customers.
Nio’s CEO and founder William Li expects it to deliver as many as 2,500 vehicles in August, or three times the amount it delivered July. In August 2018, when it only had the ES8, NIO delivered 1,121 vehicles.
Therefore, if NIO’s deliveries come anywhere near 2,500 vehicles in August, that would have to be considered a significant improvement over this time last year.
NIO’s business might not be perfect, but it’s doing its best to keep the needle moving higher.
Tesla Is Coming
The only fly in the ointment for Nio at this point, other than the fact that it loses more than a dollar for every dollar of revenue, is that Tesla likely will start producing Model 3s in Shanghai by the end of the year. And because those Model 3s won’t be subject to Chinese tariffs, their prices will drop.
Tesla is known for missing deadlines ,so I wouldn’t expect the Model 3 to become a headwind for Nio and Nio stock until the first quarter of 2020 and beyond.
As InvestorPlace contributor Will Healy pointed out on Aug. 13, Nio faces intense competition. Tesla isn’t the only other electric-vehicle manufacturer in China.
With only so much demand for electric vehicles, it’s possible that Nio won’t end up selling many cars, despite the positive reviews of its ES8 and ES6 vehicles.
The Bottom Line on Nio Stock
Last year, when I first covered Nio stock, I was completely cynical about the company because of the large amount of money it was losing. Fast forward to today, and I still believe its financial condition is a major reason to avoid investing in Nio stock.
However, I’ve come to realize that Nio stock is not such a bad investment for aggressive investors, who understand risk and reward very well.
Nio stock price is currently trading at $2.85, down from where it was trading in July when I suggested that aggressive investors should consider Nio stock.
With Nio stock price at $3 or less, it’s an even better bet from a risk/reward perspective, but don’t for one minute think NIO or Tesla belongs in your retirement account because they don’t.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.