Nio (NYSE:NIO) should be a better investment than it is, but Nio stock looks as if it’s going to lose the EV race in a big way.
The electric car revolution is coming and investors are readying their portfolios. Not only are the quieter and cheaper to run than their combustion-engine counter parts, but they’re seen as better for the environment which has helped them catch on in heavily polluted places like China.
However, while electric cars themselves are destined to gain momentum over the next decade, electric car stocks are another story. Some appear to be based solely on hope for the industry rather than solid fundamentals and that’s the case when it comes to Nio.
Back in March NIO stock was flying high at $10 per share as investors likened the firm to Tesla (NASDAQ:TSLA). However, the enthusiasm quickly faded after the firm’s lofty future plans started to look flimsy as its earnings pointed to a much rockier future. With Nio’s stock price down to just $3 per share today, you might be wondering if there’s a bargain to be had— but I’d hold off as the stock isn’t all its cracked up to be.
The Trouble with Nio Stock
While there will undoubtedly be a huge market for electric vehicles in China over the next few years, it’s important to note that investing in NIO doesn’t necessarily mean you’ll get a piece of that pie.
As Luke Lango pointed out, there are 486 EV companies currently operating in China. Although China has a massive population and there’s certainly room for more than one player, that’s a lot of competition. In America there are between 20 and 30 EV firms serving the market.
That means that the next few years will likely bring on the demise of quite a few Chinese EV players. More companies will fail than will make it, so you have to pick your player wisely.
With those terrible odds in mind, NIO stock may not be your top pick. For one thing, the firm has elected to go with a platform outside the mainstream to run its cars.
Beijing has gotten behind a standardized platform called MEB which big names like Ford (NYSE:F) and Volkswagen (OTCMKTS:VLKAY) are also supportive of. NIO has elected to go its own way with a different platform, which could create regulatory issues down the road.
Recovery Depends on Deliveries
In any case, those factors which cast a bearish shadow over NIO stock were true back in March when investors were singing the automaker’s praises and bumping its share price up to $10.
What brought NIO back to earth was a poor earnings release that showed vehicle deliveries were lower than expected. Since then, deliveries haven’t made a meaningful improvement- July deliveries came in at just 837.
August deliveries will be the true reflection of whether or not the March earnings were the beginning of the end for NIO. The company was forced to recall a number of its vehicles due to battery issues, which management said was largely to blame for the poor delivery figures in June and July. In August, management is expecting to deliver somewhere between 2,000 and 2,500 vehicles.
Hitting that target would send a positive message to Wall Street and put the buy-case for NIO back on the table. However, another month of dismal deliveries says NIO is heading for rock bottom.
The Bottom Line on Nio stock
There’s no urgency to buy NIO stock right now. The firm is due to release its August delivery figures at the end of September and I’d wait for that to even consider adding Nio to your portfolio.
However, even if the August numbers hit management’s guidance, NIO is risky. It’s hard to pick out a clear winner in such a large and diverse field, but choosing the one that has gone against Beijing’s standardized platform seems to be a risky strategy.
If you’re looking to buy “the Tesla of China,” perhaps you should just buy Tesla— the firm is building its own factory in Shanghai and its cars are not subject to the 10% purchase tax that its foreign peers are weighed down by.
For now, NIO is a no-go for me at least until deliveries are firmly back on track.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.