The big rally in Chinese premium electric vehicle (EV) maker Nio (NYSE:NIO) has been put on hold thanks to the Wuhan coronavirus outbreak. Nio stock rose about 300% from early October 2019 to mid-January 2020. But since investors started worrying about the outbreak in late January, shares of the EV maker have dropped more than 25% on the idea that Chinese consumers won’t be buying new cars so long as the coronavirus hangs around.
That’s true. And, for the foreseeable future, Nio stock looks like a classic case of near-term pain and long-term gain.
That is, it’s too early to tell when the coronavirus will stop spreading. So long as it keeps spreading, China will remain on lock-down. Chinese consumers won’t go out and shop, let alone go out and buy a new car. Nio’s demand trends will fall off a cliff. Deliveries and revenues will plummet. Against this uncertain and adverse backdrop, Nio stock will likely keep falling. At the very least, it won’t rise.
But, there’s a silver lining here.
The coronavirus outbreak won’t last forever. This outbreak is nothing new. It’s the latest in a long list of global and Chinese epidemics, all of which created scares and none of which lasted more than a few months or did that much damage to the economy. Thus, once this outbreak is contained and coronavirus fears fade from the Chinese consumer landscape, Nio’s demand trends will pick up, deliveries and revenues will rebound in a big way, and the stock will soar.
So, don’t rush to buy the dip in Nio stock today. Stay on the sidelines. Let the coronavirus outbreak develop. Wait for signs of containment. Then, buy the dip.
Coronavirus Fears Will Create Turbulence
There’s no doubt about it. Coronavirus fears will create turbulence in all Chinese stocks, Nio included. So long these fears hang around, it’s unlikely that Nio rebounds.
It’s important to note that, in China, the coronavirus outbreak has brought consumer activity to a screeching halt. In the aftermath of the outbreak, I reached out via WeChat to a friend of mine who lives in China. According him, “everyone is staying inside” and “it has stopped almost everything for most of the people out here.”
He lives in Guangzhou. That’s an 11 hour drive from Wuhan, the epicenter of the outbreak. If you look at map of China, as far as major Chinese cities are concerned, Guangzhou is about as far away as it gets from Wuhan. Consumer activity in that very-far-removed city has come to a halt. Thus, it has likely come to halt everywhere else, too.
If consumers aren’t going out and shopping, they assuredly aren’t going out and buying new cars. They especially aren’t going out and buying premium, niche cars like the ones Nio sells.
Consequently, so long as the outbreak persists, Nio won’t sell that many cars. At this point in time, the epidemic is only getting worse. Fear is only rising. It’s too early to tell when all this will stop. Thus, it’s too early to tell when consumers will start buying cars again, and it’s too early to buy the dip in Nio stock.
Nio Stock Will Bounce Back
In the long run, coronavirus-related weakness in Nio is little more than an opportunity to buy the dip.
The Wuhan coronavirus of 2020 may seem like a novelty. It’s not. Epidemics happen all the time, all around the world. And they always follow a similar pattern. They spread and create hysteria for a few months. Then, they stop spreading, and things go back to normal.
See the SARS outbreak in 2002/03. It was only about four to five months from when the World Health Organization labeled SARS a global problem in March 2003 to when the world got back to normal. Hysteria surrounding the H7N9 scare in China in 2013 lasted about four months. The H1N1 outbreak in the U.S. in 2013 was largely contained within eight months. Indeed, the average duration of a pandemic is less than three months.
The Wuhan coronavirus will follow a similar pattern. It will keep spreading and create heightened hysteria for the next few months. Given current quarantining measures and the enormous volume of resources allocated toward finding a vaccine, the outbreak will likely be contained by the summer, if not sooner. The world will get back to normal. Chinese consumers will get back to shopping, and buying new cars.
At that point in time, Nio’s demand trends will be in the early innings of a multi-year upswing, supported by increasing consumer demand for EVs in China, the expansion of more premium EV demand in the China market, new vehicle launches and continued Chinese government support of EV adoption through tax subsidies.
As those demand trends swing higher in the back half of 2020 and into 2021, Nio stock will bounce back from this coronavirus selloff.
The Bottom Line on Nio
At this point in time, Nio is a classic case of near-term pain, long-term gain. Near-term, shares will remain weak so long as coronavirus fears suppress Chinese consumer activity. Long-term, these coronavirus fears will fade, and be replaced by more enduring premium EV demand drivers.
Those demand drivers will propel a meaningful rebound in Nio once coronavirus fears fade.
As of this writing, Luke Lango was long Nio.
