Chinese electric vehicle maker Nio (NYSE:NIO) has had one of 2020’s most impressive comebacks. Late last year, it looked like NIO stock was down and out: Shares had plunged from $10 to barely more than a buck, and it appeared that the company was on the brink of bankruptcy.
![Here’s How Tencent Offers Pivotal Support for Nio Stock Moving Forward](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
However, contrary to the naysayers, Nio was able to secure crucial investments from both local governments and a powerful private backer. And with these funds in hand, Nio rode out the novel coronavirus slowdown and is revving its engines again.
As you’ll see, Nio is enjoying sharply higher sales now. And while Nio stock shares have recovered significantly, they still look cheap in light of the company’s tremendous momentum.
Tencent’s Star-Marker Ability
Just like movie studios during the “golden era” of Hollywood gained reputations as “star-makers,” Tencent Holdings (OTCMKTS:TCEHY) possesses a similar skill in the corporate world. Thanks to the company’s timely tactical investments, it has made stars out of many companies — such as the Chinese food-delivery company Meituan Dianping (OTCMKTS:MPNGY). Less than two years ago, Tencent spent about $10 billion to buy 20% of the company. And today, that stake is worth more than $24 billion.
Prior to the music streaming company’s initial public offering, Tencent engaged in a share swap with Spotify (NYSE:SPOT). It gave Spotify equity in Tencent Music (NYSE:TME) in return for 7.5% of Spotify. In turn, Tencent’s position in Spotify has doubled in value since then and is now worth $4 billion.
Tencent has also had a longtime partnership with China’s second-largest e-commerce platform, JD.com (NASDAQ:JD). Tencent owns stock in JD directly, and also collaborates with the company on a number of other businesses, subsidiaries and strategic ventures. Moreover, Tencent, JD and their related companies make up a large economic ecosystem within China. Therefore, they can provide substantial capital and marketing opportunities to firms that they back.
Tencent Continues To Believe In Nio
In this context, Tencent’s massive, ongoing investment in electric car company Nio deserves our attention. Earlier this month, Tencent snapped up 1.68 million additional Nio stock shares for $10 million. That investment was a relative pittance, compared to Tencent’s previous investments.
Overall, Tencent had invested $510 million in Nio before its 2018 initial public offering. Subsequent to that investment, Tencent made a number of additional purchases, and it now owns 15.1% of the company. This makes Tencent the largest individual owner of NIO stock in dollar terms, and the second-largest holder in terms of voting rights; it trails only Nio founder and CEO William Li in that regard.
So far, however, Tencent doesn’t have much to show for those investments. In fact, Nio’s shares had been on a major losing streak since the IPO, and have only recently started to recover. But if past is prologue, something good is about to happen at Nio. And we’re seeing signs of it already.
Nio Has Regained Operational Momentum
For one thing, Nio’s production rate of new cars is growing, and its losses are shrinking. The company recently revealed that it delivered 3,436 vehicles in May 2020, representing an outstanding 215.5% growth rate year-over-year. This should refute the idea Nio bears had been peddling that the coronavirus had largely eliminated demand for the company’s products.
Also, Nio is a luxury brand within China, and it will take a while for it to sell large numbers of cars consistently. Still, though, 215% growth is an excellent stepping-stone. I mean, think about it this way: Even if there’s no further growth, at the current 3,500 cars-per-month rate, Nio would deliver more than 40,000 cars over the next 12 months.
For perspective, that 40,000 cars annually rate of production is roughly one-tenth of Tesla’s (NASDAQ:TSLA) output. And yet, Tesla’s valuation is currently almost 20 times higher than Nio’s. So if you value Nio and Tesla at the same level per car that they deliver, Nio’s share price would nearly double to almost $15 per share.
The Bottom Line: Nio Is a Bargain Compared to Tesla
I make that comparison just for kicks, as there are clearly many other factors that influence Tesla’s and Nio’s valuations in addition to their production levels. Still, though, it should give you a sense of Nio’s upside if things go well. The company has been battling skeptics and a funding shortages for so long that investors lost sight of the EV maker’s blue-sky potential.
That said, Tesla went through a similar period of doubt and uncertainty a couple of years ago. In turn, short sellers bashed the company, and Elon Musk suggested bankruptcy was imminent. Yet, look where Tesla is now.
Therefore, with the support of China’s kingmaker Tencent, Nio has the possibility of enjoying a similar trajectory in coming months and years.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.