Shares of Chinese premium electric vehicle (EV) maker NIO (NASDAQ:NIO) have been on a roller coaster ride ever since the company went public about a year ago. Over the course of the past year, the NIO stock price nearly doubled from a $6.26 IPO price to $12 within its first few days on Wall Street. That gain was clawed back to $6 over the next few months. Then, the ride took off again in early 2019, going to $14. Then, investors kicked shares lower over the past six months to where they are now, just above $3.
Amid all this volatility, I’ve consistently sounded a cautious and bearish tone on NIO stock. My thesis has been pretty simple.
There are a lot of EV brands in China. Not all of them will make it long term. In fact, very few of them will actually survive. Right now, probabilities and fundamentals suggest that NIO won’t be one of the survivors. As such, while NIO stock could go boom long term, the more likely outcome is for the stock to go bust.
I maintain that cautious thesis today.
To be sure, there are signs that China’s auto market and economy are re-accelerating. That’s good news for NIO stock. But, until this company can impress investors with numbers that it will remain a relevant player in China’s booming EV market for the foreseeable future, I don’t think NIO stock will stage a meaningful move higher.
As such, there’s no rush to buy into NIO stock today. In this situation, patience is your friend. Monitor the China EV market and NIO’s trends in that market from the sidelines. If signs appear that NIO is improving its competitive positioning, buy into NIO stock. Until then, stay away.
The Good News For NIO
The good news for NIO stock is that China’s economy and auto market appear to be bouncing back after a multi-quarter slowdown.
On the broad economic front, most data coming out of China implies that the worst of the country’s multi-quarter economic slowdown — which started in early 2018 — is now in the rear-view mirror. Retail sales trends, in a downtrend since early 2018, have gradually improved over the last few months. PMI readings, similarly in a downtrend since early 2018, have stabilized over the last few months. Industrial profit growth rates have shown consistent improvement throughout 2019. The OECD’s composite leading indicator for China has actually improved for five straight months. Many of China’s biggest companies — like Alibaba (NYSE:BABA) and JD.Com (NASDAQ:JD) — have actually reported better-than-expected numbers over the past few months.
Meanwhile, on the auto front, we are seeing similar signs of a turnaround. Specifically, China’s auto market has declined for 13 straight months, with many of those months posting sizable declines. But, in July, the market dropped only 4.3%, one of the smaller declines in recent memory. There has also been a push from the government to further support EV adoption in urban areas through the removal of certain auto purchase restrictions which have constricted demand.
Overall, then, the economic data coming out of China broadly implies that this country’s economy is finally starting to turn the corner, and that China’s auto market is following suit. That’s all great news for NIO stock.
The Bad News For NIO
The bad news for NIO stock is that re-accelerated economic and auto market expansion in China might not create a tide which lifts all boats.
The big, overarching problem with NIO is that it is one of 486 EV companies in China. You read that right. There are 486 EV companies in China. That’s far too many. In America, there are no more than 20 to 30 electric vehicle companies. In the long run, as China’s EV market matures, rationalizes, and consolidates, it will down-size to something very similar to the U.S. EV landscape — or, about 25 EV companies.
In other words, 95% of China’s EV companies today, probably won’t be around by 2030. Those aren’t good odds for NIO.
Current trends are similarly unfavorable. NIO’s delivery volume peaked in the fourth quarter of 2018 at nearly 8,000 deliveries. Ever since, delivery volume has dropped … significantly. In the first quarter of 2019, NIO delivered less than 4,000 cars. In the second quarter, it delivered around 3,500 cars. This quarter, the company is on track to deliver about 2,500 vehicles.
In other words, from late 2018 to today, NIO’s quarterly deliver volume rate has shrunk nearly 70% and that’s with NIO launching a new vehicle in mid-2019.
Those are ugly trends. Broadly, they imply that NIO may not have what it takes to last long term in China’s auto market. So long as the trends support that thesis, NIO stock will remain depressed.
Bottom Line on NIO Stock
Long term, NIO stock could go boom if the company does turn into the go-to premium EV brand in China’s booming electrics market. But the data right now simply does not support this thesis. Instead, it supports the thesis that NIO will be among the 95% of China EV companies that ultimately goes bust instead of boom.
As such, the best move right now with NIO stock is to wait-and-see. Wait for more numbers to come out of NIO and China. See if NIO’s trends are improving, or not. If they are improving, buy into the rebound bid. If they aren’t, continue to stay away until they do.
As of this writing, Luke Lango was long BABA and JD.