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2 Pros and 2 Cons to Consider Before Buying Nio Stock

Nio's stock can power through the negative rhetoric

Potential investors in Nio (NYSE:NIO) stock may consider it based on its position as a growth stock. Others see it as a potential diversification play into Chinese business within their respective portfolios. Those perspectives alone will give many investors the impetus to scrutinize Nio and judge whether to buy its shares or not. With that in mind, here are three pros and a con of buying Nio stock.

2 Pros and 2 Cons to Consider Before Buying Nio Stock
Source: Sundry Photography /

Nio doubled deliveries in April 2020 year over year from 2019. The company’s delivery of 3,155 vehicles in April 2020 represented an increase of more than 105% over April 2019.

This year-to-year monthly growth represents tangible progress. Doing so in the midst of a pandemic will certainly pique investor interest going forward. Importantly, Nio showed even stronger overall YoY sales growth of 180.7%. Immediately following the news, Nio’s stock spiked 10%.

Outpacing Tesla, Only Nio Should Benefit From China’s EV Subsidies

Nio was founded in late 2014 and to-date, it has delivered close to 40,000 of its flagship ES6 and ES8 vehicles. Tesla (NASDAQ:TSLA) managed to deliver only 147 vehicles from its inception through an equivalent period. Of course, Nio benefited from Tesla’s example. After all, Tesla was at the very forefront of electric vehicle mass production, which was inefficient. However, Nio’s delivery numbers are impressive and should give investors reason to believe Nio stock can rise significantly.

Further, China recently provided a big boost to Nio in the form of its EV subsidy policy. The subsidies benefit Nio, not Tesla based on price limitations. Tesla will be forced to lower their price point if it wants to incentivize Chinese consumers to take advantage of the policy. China’s subsidy policy was likely crafted in favor of Nio, while squeezing Tesla out. The net effect is a win for Nio. 

China’s Baby

Recently, Nio received a nearly $1 billion investment from state-owned enterprises. As a result, investors have acquired a 24.1% stake in the company. Nio receives a vital cash injection, which will buoy it going forward. This also means that those state-owned enterprises have even more reason to consider the company as their national champion. Pundits believe this agreement should set it up for preferential deals and future financing. The company, already seen as Tesla’s Chinese rival, will be further bolstered in its fight against the American EV giant. Going forward, it will have the clout of an economic titan behind it, which should guide Nio stock higher in time. 

Analysts who keep a keen eye on China’s EV firms believe this recent deal should benefit Nio overall. Sino Auto Insights founder Tu Le believes the agreement “puts them in a better place than any of their domestic competitors.”

The Red Scare and Nio Stock

As a growth company, Nio will continue to experience ups and downs. So it will both hit analysts estimates, and falter and disappoint going forward. Growth companies are inherently volatile. But I think Nio’s story is going to be equally defined by another narrative.

This is simply that Nio has hurdles to overcome by dint of being a Chinese firm.

Any investment in Nio’s stock can be interpreted as tacit support of China’s Communist Government. The current trade war exacerbates this problem for all Chinese firms. Retail and institutional investors, especially those in the U.S., should consider such risks. Being that Nio has accepted financing directly from the Chinese government, this is doubly true. Regardless of where you fall on this argument, such sentiment will affect the company and its stock price. So, even when the company makes all of the right moves, political sentiment does pose a risk that can lower prices. Should Nio find itself squarely in the crosshairs of political rhetoric, its stock could suffer dramatically. 

NIO Had Little Choice

Further, NIO would likely have preferred private investment for funding over the Chinese state. Nio stock simply hadn’t provided enough return for investors by then, and private investors were not as willing to plow money into the company. EV manufacturers have been plagued by this problem as demand has yet to meet EV hype. The result is that Nio will now be subject to the control of the Chinese government to a higher degree than before.

However, even with trade war rhetoric concerns, I believe Nio represents more upside than it does risk. China has a massive population. Coupled with its championing of Nio, this puts the company in position to pop when EV acceptance and sales in China reach a critical mass. Nio’s stock trades below $5, making it a very cheap pick up with a ton of upside.

As of this writing, Alex Sirois did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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