It has been quite the fall from grace for Chinese luxury electric vehicle maker Nio (NYSE:NIO). Earlier this year, NIO was heralded as the Chinese Tesla (NASDAQ:TSLA) — a company in the early innings of a robust growth narrative that ultimately would end with NIO selling hundreds of thousands of premium electric vehicles into a very big and rapidly expanding market.
At that point in time, NIO stock was trading hands north of $10. Then, reality hit.
The reality here is that Nio is not the Chinese Tesla. Tesla has many advantages in the EV market, including first-mover’s advantage, a branding advantage, a battery tech advantage, an autonomous driving advantage, a data advantage and a production capacity advantage. Nio doesn’t appear to have any of those advantages. Instead, the only similarity Nio appears to have with Tesla is that both make luxury EVs.
That similarity hasn’t been enough for NIO stock. The company has been delivering cars for just over a year, and already, the company’s delivery volumes are sharply declining. As those delivery volumes have declined, NIO stock has sunk. Today, shares trade hands below $2.
What’s next for NIO stock? Probably more weakness. To be sure, I don’t think investors should count Nio stock out just yet. There is a semi-visible pathway here for Nio to turn into a multi-bagger in the long run.
But, at the current moment, the bear thesis is more convincing than the bull thesis. So long as this remains true, NIO stock will likely remain depressed.
NIO Has Problems
There are three big problems with NIO stock, and when put together, they paint a bearish picture of where it could go next.
First, China’s EV market is way too crowded. There are nearly 500 electric vehicle companies in China. Probably only around 20 to 30 of those companies will survive in the long run as the market matures and consolidates around the biggest, most differentiated players. Thus, reasonably speaking, 95% of China’s EV companies today won’t be around in a decade.
Second, Nio’s delivery volumes are tanking in 2019 despite: 1) mostly robust growth in China’s EV market year-to-date, and 2) NIO launching the new ES6. NIO’s second-quarter delivery volumes dropped 11% from the first quarter, and were down 55% from the fourth quarter. On an apples-to-apples basis (excluding ES6 deliveries from Q2), second quarter deliveries were down more than 20% sequentially, and down more than 60% from the fourth-quarter peak. Thus, consumer appetite for NIO’s luxury EVs in China seems to be greatly limited.
Third, the company’s financials aren’t pretty. Gross margins are negative. Net losses are wide. Cash burn is significant. The cash balance is dwindling. At this rate, the company may not have enough cash to sustain operations for much longer, barring a capital raise.
Putting all that together, Nio: 1) all else equal, has a 95% chance of not being around in a decade, 2) has significant demand problems and 3) is financially distressed to the point where the company probably needs to raise substantial cash to keep its doors open. That broadly paints a bearish picture of where NIO stock could go next.
Don’t Count the Stock Out Yet
Although the bear thesis looks more convincing than the bull thesis today, investors would be unwise to completely discredit the possibility that NIO stock turns into a multi-bagger from here.
The logic here is simple. NIO may just have launched its cars at the wrong time. China’s EV market is up in 2019. But, the market is slowing, because China’s economy is slowing. When an economy slows, consumers tend not to buy expensive, luxury things — they tend to buy cheap things. NIO launched the luxury ES6 and ES8 against this unfavorable auto backdrop for luxury cars. As such, demand for Nio’s vehicles may not be permanently weak — instead, demand for luxury EVs in China may be temporarily depressed by slowing economic expansion.
Once China’s economy stops slowing, luxury EV demand may come back into the market in a big way. If it does, Nio’s delivery volumes could re-accelerate higher. Then it could leverage this growth to craft a niche for itself as the de facto luxury EV company in China — which is what the company was supposed to be all along.
In this world, NIO could end up being a company which delivers hundreds of thousands of vehicles into China’s huge car market. If this happens, the company could command a $10 billion-plus valuation in a decade, versus a $1.6 billion market cap today.
Bottom Line on Nio Stock
I wouldn’t write off Nio stock as a bust just yet. Yes, I think the bear thesis is more convincing than the bull thesis at the current moment. If that bear thesis does play out, there is a pathway for NIO stock to ultimately end up at $0. That’s why I continue to avoid shares.
But, there is also a pathway here for NIO stock to climb back to $10. That pathway lacks visibility today. But, all it may take is one good quarter or a rebound in China’s economic conditions to clear up that pathway.
Stay away from NIO stock, for now. But, watch for clues that the fundamental trends are improving.
As of this writing, Luke Lango was long TSLA.