The Bullish Case for Nio Stock Is Greatly Misguided

Nio (NASDAQ:NIO), called the “Tesla of China,” has gotten what amounts to a government bailout. That begs the question: How should investors approach Nio stock now?

The Bullish Case for Nio Stock Is Greatly Misguided

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In February, the company was close to collapse. Then it got a $435 million loan to keep the lights on. Then it announced March deliveries of 1,533 vehicles, more than twice the previous month.

The delivery number put a bid under Nio stock, which shot up 15% on April 6. It has since held much of the gain. Some people think this makes the stock a buy.

I disagree.

Nio Got a Bailout

China signaled its intention to keep Nio alive in February, signing a $1.4 billion deal through the government of Hefei. Hefei is the home of JAC Motors, the state-owned car company leading China’s electric car efforts.

The price of the bailout is that Nio will be incorporated into the mainstream of Chinese car operations. The company agreed to build new offices in the city and “deepen its relationship with local ecosystem partners,” its press release said.

Since the deal was announced, China’s economy has begun to re-open. China got the novel coronavirus first. It did contact tracing and a strict quarantine. It’s returning to something like normal. That’s why the delivery numbers jumped.

Tesla Rampant

But Tesla is still rampant in China. Tesla sold over 10,000 cars in China during March. That’s more than 6 times Nio’s total. Tesla took a 30% share of the country’s electric car market. It aims to produce 150,000 Model 3 sedans in Shanghai from its own factory this year. Overall, China’s car sales were down over 40% during March. Nio, on the other hand, abandoned efforts to build its own factory last year.

I didn’t expect the cavalry to come for Nio, but it did. That’s the good news.

The Bad News

The bad news is that Nio is no longer unique.

JAC is one of China’s “big four” companies. Most Chinese car companies are state-owned but compete fiercely. JAC’s main rival in electrics is BYD, a privately-held company, originally focused on batteries. BYD is known here for getting a $230 million investment from Berkshire Hathaway (NYSE:BRK.A , NYSE:BRK.B) a decade ago, a 10% stake.

JAC has a joint venture with state-owned FAW Motors and Volkswagen (OTCMKTS:VWAGY) to develop a Modular Electric Drive Matrix (MEB) platform for China. It’s a set of standards for electric vehicles, which Ford Motor (NYSE:F) has signed onto for the U.S.

Nio will become a high-end plug-in on JAC’s version of this line-up. InvestorPlace Contributor Josh Enomoto says the bear market and oil wars bode poorly for Nio. I feel more certain Nio will survive, but don’t think you should invest in NIO stock.

The Bottom Line on Nio Stock

China is leading the electric car market. It’s going to be a mass market. The only effective competitors to China’s state-run efforts are Volkswagen, which cooperates with it, and Tesla, which is showing it what to do.

Nio is going to be a small player, a high-end nameplate like Ferrari (NYSE:RACE). It will add cachet and style to JAC Motors, but it won’t really be separate, and it won’t ever be a mass market play.

Over time, I see promise in mass market electrics. Electrics and self-driving automation are going to move in tandem this decade. Cars by 2030 will be more of a verb, something you use, than a noun, something you keep in your driveway.

I don’t see a big future for Nio in that world.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhornAs of this writing, he did not hold a position in any of the aforementioned securtites.

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