Nio Inc (NASDAQ:NIO) stock has been on a downward slide since a lukewarm intial publi offering (IPO) in September 2018.
By the looks of it, some analysts are still bullish on NIO stock, but if the company disappoints on their projection of between 2,000 and 2,500 deliveries for August, whatever bullish sentiment remains may fade quickly.
Nio Is Stuck in the Middle of China’s Problems
Yes, it’s fair to point out that the Chinese economy is slowing. It’s also accurate to note that Chinese auto sales have slumped. While some of that is due to the trade war with the United States, the Chinese government has recently reduced subsidies that were providing a buying incentive for electronic vehicles.
Nio also self-reported a battery recall for its ES8 vehicles. While recalls are never a good thing, investors are willing to overlook them, particularly in an industry that is still in its infancy.
When you’re looking at a stock as a long-term investment, you have to expect some eggs to get broken along the way. Failing forward is forgivable. And with shares hovering around the $2 mark, the potential reward might be worth the risk.
But Declining Deliveries Equal Limited Growth Potential
Putting those issues aside, a car company has to sell cars. And Nio is just not doing enough of that for my liking. The company reported delivery of 837 vehicles in July, a number that was down 38% from its June peak. CEO William Li cited the voluntary battery recall as the reason its deliveries plunged. Li also remarked that the company brought some July deliveries forward into June ahead of the subsidy cuts.
But July deliveries only tell part of the story. As my colleague Laura Hoy pointed out Nio has been reporting disappointing delivery numbers for quite some time. You see, the 38% decline in deliveries since July was on the heels of an underwhelming 1,340 deliveries in June. This was after a disappointing Q1 earnings report largely due to, you guessed it, lower-than-expected deliveries.
The Bullish Case Is Becoming Harder to Make
The bullish sentiment for NIO stock (and other manufacturers such as Tesla (NASDAQ:TSLA) is that the electric car market is a tide that will rise all boats. Put another way, “if you build it, they will come.”
OK, enough with the clichés.
There is no arguing that the electric car market is growing. According to a McKinsey report, global sales for new electric vehicles passed the one million mark in 2017, and the market is expected to grow to 4.5 million cars by 2020. That is approximately 5% of the overall global light-vehicle market. China is unquestionably the leading market for electric cars, surpassing the United States and Europe combined. The Chinese market is also set up with government subsidies and a favorable regulatory environment.
With that said, mainstream market adoption is still a way’s off for most developed countries. A separate McKinsey study defines four stages of market adoption:
- Detectable — there are faint signals with lots of noise
- Clear — there is emergence of a validated model
- Inevitable — there is critical mass of adoption
- New Normal — the industry is at scale and mature
According to that same McKinsey study only China and Sweden are even in the second phase of market adoption. And if China is leaps and bounds ahead of everybody else, it’s fair to say the market is far from mature.
The electric car market can be viable and growing.
Nio stock may not be a great investment.
Both statements can be true. It’s up to Nio to prove otherwise, and that’s why their August delivery numbers will be so important.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.