In February, I wrote an article comparing buying shares of Nio (NYSE:NIO) to investing in a cannabis company. My basic argument was that you can believe in an emerging industry and still believe that not every company is going to be around to see the payoff. That was and remains my argument against Nio stock.
Nio is burning an uncomfortable amount of cash. And there are two concerns with that. First, although cash burn is expected for a growing company, Nio does not need cash for growth. The company needs the cash to continue operating.
To that end, the company has received some funding. But that brings up my second concern. As my InvestorPlace colleague Tom Taulli points out, the company is receiving the bulk of its recent money from the municipal government of Hefei, China.
To be fair, receiving what amounts to 10 billion yuan from Hefei’s government goes a long way to helping the company’s balance sheet. So, in the short term, there should be little concern about Nio going forward as a viable business. However, investors can’t help but ask why private investors are staying away from the stock. And as Taulli correctly observes, that government money is likely to come with strings attached.
Competition Will Hurt Nio Stock
One of the under-reported problems for Nio has to do with the emerging threat from European competitors. So far, Nio’s primary competitor has been Tesla (NASDAQ:TSLA). But in an email to InvestorPlace, Veljko Fotak, PhD, associate professor of the Department of Finance School of Management at the University of Buffalo, voiced this concern about Nio stock:
I believe that Tesla and Nio have greatly benefitted by the delayed entry of the European big brands into the electric space – mostly, due to fear to cannibalize their own sales of internal combustion engine vehicles. But that trend is now breaking, driven, at least in part, by the recent diesel emission scandals in Europe. Over the last year, we have seen new electric vehicles appearing in the lineups of all the major German houses. Can Tesla and Nio compete with the deep pockets of those giants? My hunch is not. Early-mover advantages give some hope… but I am skeptical about those being real long-term barriers to entry. The R&D budgets of BMW or Audi will erode that early start pretty fast.
Nio Cannot Sell Its Way Out of This Hole
Nio bulls will say that Nio is a long-term play. The argument goes like this:
Electric cars are a viable and growing market.
China is the biggest market.
Nio is a Chinese company.
And some combination of those three sentences is supposed to equal a profitable company. But the problem is that it’s not. And analysts’ forecasts through most of 2021 show that the company is not likely to become profitable anytime soon.
As Fotak points out, Nio has a strong focus on capturing the growth of the Chinese middle class. However, Nio’s cars are among the most expensive on the market. And while it’s true that the company will continue to receive government subsidies, that hasn’t resulted in the company turning a profit.
And Then There’s the Coronavirus?
When specifically asked if the coronavirus would have an effect on Nio in 2020, Fotak said given that Nio stock “has always been a long-term bet,” the company and Nio stock will be “less affected by the short-term impact of the epidemic.”
And as Luke Lango wrote in a recent bullish article, when and if the virus abates and consumer fear subsides, Nio appears to be well positioned. Lango cites the increase in electric vehicle hype in China as well as the Chinese government subsidies that remain in place.
But the virus, while disruptive, doesn’t change the landscape for Nio. The company is in a race against time. And that is a race that they may not be around to see the end of. Maybe they’ll get bought up. They make an attractive car. But the EV market is an emerging market, and as much as many people want it to be here today, it won’t be here for several tomorrows.
Investing in Nio is believing that tomorrow is sooner rather than later. Count me out of that bet.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
