Perhaps no stock on the NASDAQ is as disparaged these days as Nio (NASDAQ:NIO). The Chinese maker of luxury electric vehicles is currently seeking a $200 million cash infusion from Tencent Holdings (OTCMKTS:TCEHY) and CEO William Li. Meanwhile, it’s due to report August deliveries on September 24.
If the delivery numbers are as bad as July’s 837, it could spell the end for the hugely hyped company. This is especially true given a recall of 4,803 ES8 vehicles over battery issues.
Shares of NIO stock that were trading at over $10 as recently as March closed yesterday at $3.14. The company’s market cap has been whittled down to $3.17 billion, against $6.6 billion of debt as of March. That’s the most recent financial report on record, and was delivered in late May, unaudited.
The Wrong Approach
I called Nio too speculative in July, after the stock rose on an unexpected pick-up in deliveries.
The problem here isn’t the EV market but Nio’s approach to it. Despite disappearing subsidies, electric cars will be a mass market in China. Beijing is committed to a standard platform dubbed MEB that has already won support from Volkswagen (OTCMKTS:VLKAY) and Ford Motor (NYSE:F) in the U.S.
The problem is that Nio is not using MEB. Instead it is trying to define a high-performance category of electrics and compete directly against Tesla (NASDAQ:TSLA), which is building a factory in Shanghai.
Nio lent its high-end EP9 for review by The Grand Tour, an Amazon (NASDAQ:AMZN) Prime show, and the hosts were impressed. But that vehicle isn’t street legal. The car has set new track speed records and it might still impress as a race car. But Nio sold out its racing team in April.
Electrics are Coming
Electric cars are coming. They’re simpler than internal combustion engines. They need less service. They’re quiet. They cost less to run. Tesla has proven the market for them. China is committed to them.
But China has its own way of building industries. It subsidizes early entrants heavily, establishes standards, then removes incentives as production ramps up. That’s what is happening now.
The biggest winner looks to be BYD (OTCMKTS:BYDDF), which had sales of over 73,000 vehicles in the second quarter. Warren Buffett took a nearly 10% stake in BYD a decade ago when it was just a battery maker.
While cars using fossil fuels succeed based on design and mass production techniques, electrics are all about the batteries. Getting the batteries right, getting them into mass production efficiently, makes everything else possible. That’s what Tesla did. The company’s secret sauce is all in its Nevada battery Gigafactory. That’s the approach BYD is taking, focusing first on the battery, then on low-cost production standards.
Li’s Not Musk
Nio CEO Li seems obsessed with Tesla CEO Elon Musk. He launched dozens of companies before Nio, selling BitAuto, a provider of online services for China’s auto industry, in 2013.
Before NIO stock’s IPO, Li convinced many big companies to invest, including Baidu (NASDAQ:BIDU), Tencent and Lenovo (OTCMKTS:LNVGY). Forbes says he’s worth $1.3 billion. But if most of that is in Nio, Li could wind up as China’s Preston Tucker rather than its Elon Musk, which made for a great movie but a tragic story.
Bottom Line on NIO Stock
InvestorPlace writers are unanimous: No to NIO stock.
Sadly, they’re right.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.