The last year has been rough riding for investors in Nio (NYSE:NIO). Nio is just one of 486 Electric Vehicle (EV) manufacturers in China fighting for a piece of the world’s largest auto market. Since the NIO stock IPO a year ago — almost exactly — quickly hit an all-time intra-day high of $13.80, a volatile path has Nio stock has down at $3.25.
The reason for this rollercoaster price action? Nio stock price has often been buoyed when it is touted in the media as the up and coming Tesla (NASDAQ:TSLA) of China. But then investor expectation comes back down to earth over the trade war, Nio’s declining revenues and four straight quarters of losses — with no near-term turn around in sight.
Investor sentiment is decidedly skittish on the Chinese EV market — but Nio in particular. Competition is ruthless, and Nio’s cash burn is turning into a forest fire. For the quarter ending December 31, Nio burned through nearly $370 million in cash. By any account, bankruptcy lawyers at major Shanghai law firms should be circling overhead ready to pounce on Nio.
But when there is blood on the streets, value investors are also ready to pounce.
Despite considerable downside risk, Nio stock still may represent an excellent strategic bet in the days leading to the next earnings announcement on September 24 for the second quarter of 2019.
Here are three reasons why Nio stock should not be dumped just yet:
1) Tencent Holdings Putting Money on Nio’s Roulette Table
Last week, Tencent Holdings (OTCMKTS:TCEHY) and NIO’s CEO William Li, announced a $200 million investment into Nio’s convertible debt.
This type of private placement, where Nio will pay a mere 2% interest, strongly suggests that Li was able to convince Tencent there’s considerable upside in Nio stock. Convertible debt is often issued to companies with mediocre credit, but excellent long-term prospects. The debt can be converted into an option to buy equity at a price determined at issuance. Tencent is a giant Chinese conglomerate hedge fund with investments across the globe in e-commerce, gaming, internet-related services, media, entertainment, artificial intelligence, and technology.
In this case, Nio equity is dirt cheap. Tencent and it’s CEO Ma Huateng — often called the Warren Buffett of China — could stand to make a multiple of their initial $200 million convertible debt investment if Nio stock price takes off. If Nio goes under, by contrast, the $200 million will likely be wiped out.
2) Nio Is Not Just a Car — It’s a Lifestyle Concept
Nio has long sought to position itself not merely as a manufacturer of metal vehicles with four wheels.
Instead, much like Toyota Prius and Tesla, Nio wants to be seen as a lifestyle concept. Prius owners were not merely buying a car; they were making a statement about environmental sustainability. Similarly, Nio is positioning its product line as an uber-trendy fashion statement. This branding approach will help differentiate Nio from the massive competition in the Chinese EV market.
Nio is spending heavily to establish its fashion credentials. For example, according to their corporate press release, NIO and Central Saint Martins University of the Arts, the London-based art and design college, teamed up to launch their “Blue Sky Thinking” global community of designers. The innovative design initiative brings together design talent and creates environmentally friendly designs for not just Nio EVs, but also fashion and accessories.
While Nio EVs may not be parading down the catwalk at New York Fashion Week, Nio nonetheless wants to be seen as a fashion must-have. And Nio is spending to create that brand identity.
3) Nio Does Make a Quality Product
Despite the rough start for Nio stock and its shaky top-line revenues, Nio does make a quality product.
Just last July, J.D. Power released its Inaugural China New Energy Vehicle Experience Index Study. In the J.D. Power study, the NIO ES8, their latest model, ranked highest among midsize/large EVs. For the NIO product range as a whole, Nio ranked highest of all brands for new energy vehicle and new-vehicle quality.
Indeed, there is no guarantee that Nio will rebound anytime soon. The next quarterly earnings call could bring even more bad news for already hard-hit Nio stockholders. But one way or the other, particularly with deep-pocket financial backers like Tencent holdings, Nio should survive.
With every downtick in price, Nio stock becomes an even better long-term value play.
As of writing, Theodore Kim does not hold any position in the above mentioned stocks.