Years from now, how will we look back on Nio (NASDAQ:NIO)? I believe that we will view Nio in a similar way as many cannabis companies. It was one of the first through the door in an emerging market, but ultimately did not have staying power.
I could get into the details about the Nio stock price relative to its financial position. But to make the argument I’m attempting to make, you just have to compare the Nio stock chart for 2019 with just about any significant cannabis player.
In this example, let’s look at Canopy Growth (NYSE:CGC). Investors soured on the stocks at roughly the same time and it’s been downhill ever since.
The Bottom Line Is the Bottom Line
Like cannabis stocks, investors are looking for actual profit. The simple reality is that Nio is not turning a profit and does not look like it will be profitable any time soon. But that’s hard to know because the company has yet to submit its financials for the third quarter that ended two months ago.
And that only adds to investor skepticism, particularly since many analysts believe that Nio will run out of cash very soon. But I think the most important thing to note about Nio stock is that the supply and demand dynamic is just not there.
Electric Vehicles Are a Viable, Emerging Market
This is where my comparison of Nio to a cannabis company takes a detour, but not a U-turn. In the case of cannabis in all its forms, there clearly seems to be robust demand. The problem is a lack of (legal) access to the product. Therefore, the prime movers for cannabis stocks are legalization and regulation, particularly in the U.S.
For electric vehicles, the issue is more of demand. I’m not an EV doubter. The market is far more robust in China than it is in the U.S. However, the movement towards “electrification” of the auto industry is real. And the infrastructure continues to develop in the U.S.
However, the electric car market requires demand for alternative energy vehicles. That demand tends to erode in the face of sticker shock. In the case of Nio, a car starts at $52,000. That’s out of reach of most mainstream consumers in the U.S. and apparently in China as well.
Subsidies and Quotas Are a Lose-Lose Proposition
China may be the perfect target market for electric cars. And as the “Tesla (NASDAQ:TSLA) of China,” the Chinese government is betting on Nio to transform the Chinese economy. But what an investor can’t overlook is that Nio’s cars are unattainable for the vast majority of Chinese citizens. And even for those that can afford the product, the Chinese government needed to provide an incentive in the form of generous government subsidies.
The Chinese government removed those subsidies earlier this year. Subsequently, Nio’s deliveries fell off a cliff and with it, the company’s stock price.
But the Chinese government is not giving up so easily. Their latest solution would place a quota on alternative vehicle sales in China. The Chinese Ministry of Industry and Information Technology has drafted a proposal that seeks to ensure 25% of all vehicles sold in China in 2025 will be either hybrids or fully electric vehicles.
The proposal is certainly a nod to China’s need to meet air pollution targets and reduce the government’s dependence on foreign oil. But it’s not difficult to make the case that it may also be a way for the country to prop up Nio without flooding the company with more cash.
My Final Thoughts on Nio Stock
Nio stock is in the penny stock range for a reason. It is trying to sell an expensive product to a country that does not have the robust upper class that everyone suspects. The company doesn’t manufacture its own product so it’s hard to define a value. And it requires subsidies or government-mandated quotas to prime the pump for meaningful delivery numbers.
Those are three strikes that are hard to ignore.
I believe electric vehicles will become a cost-effective reality. And it may happen faster than the legalization of cannabis (and the profitability of companies in that industry). I also have serious doubts that NIO will see that day in its present form.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.