Since starting life as a publicly traded company in September 2018, Nio (NYSE:NIO) has until recently had a rough go in the markets. At one point last year, Nio stock traded briefly in the double-digit price range. Near the end of December, NIO was trading at subterranean levels, though warming U.S.-China relations did end up sparing some blushes.
Of course, the novel coronavirus quickly struck global markets shortly thereafter, sending virtually every company into a tailspin. Again, Nio stock found itself in the doldrums. With China choosing to deploy a draconian shutdown, there was little incentive to go out and buy a vehicle, electric or otherwise.
However, the March lows appear to have been the bottom. Over the trailing three months, Nio stock has delivered a remarkably bullish performance. Just in the month so far, shares have exploded higher to the tune of over 72%. With China reopening and consumer sentiment gradually returning, investors pushed valuations higher in hopes of a full recovery.
Of course, with NIO having run up so far, so quickly, it’s fair to have some hesitation now. Although I have shifted my opinion about this company in a more positive light, for now, I think tactics reign supreme. Primarily, I believe that trader psychology will determine the nearer-term trajectory more so than the underlying fundamentals.
In other words, if you were a frustrated stakeholder in Nio stock, what would you do? Likely, you’d hit that sell button to secure some profits. Additionally, the headlines don’t offer the greatest encouragement. For example, rising coronavirus cases in the U.S. present a possible headwind against NIO because of the interlinkage between the American and Chinese economies.
China’s “Trolling” Business Model Is Perfect for Nio Stock
A long time ago, I saw a parody skit for a fictional company called “Undercutters.” The premise was that a no-name pizza delivery person would follow a driver of a brand-name pizza company to a customer’s house. When the customer opened the door, the Undercutter driver would jump out of nowhere, offering a cheaper price than the brand-name pizza.
Put another way, the Undercutter driver is an entrepreneurial troll. He has no brand and therefore no shame. Aggressively, he can market his products with almost nothing to lose.
In a similar vein, that’s the underlying thesis for Nio stock. When the coronavirus gut-checked the Chinese electric vehicle market, this slump represented “a headache for China’s political leaders, who have championed EVs in hope of turning the country into a world power in next-generation transport,” according to the Wall Street Journal’s Trefor Moss.
Forget the low-hanging fruit that Nio stock and its ilk fell on lowered sales expectations. Rather, Chinese leaders were worried about the demand loss because it was their ticket to troll the automotive community.
I’m not just talking about Tesla (NASDAQ:TSLA), although that is Nio’s natural target. Additionally, I’m referring to automakers like Toyota (NYSE:TM), Ford (NYSE:F) and General Motors (NYSE:GM).
To understand EVs, you must first understand the “analog” competition. Combustion-engine vehicles combine science and artistry. You don’t see too many startups succeed in this arena because combustion cars are difficult to make.
On the other hand, EVs, as investor James Dyson demonstrated, are “too easy” to make. Essentially, Chinese companies can skip all the research and development that goes into making compelling and reliable cars. Instead, they can start selling right away.
Unfortunately (for them), the coronavirus ruined Chinese EV makers’ plans, frustrating China at the governmental level.
Live by Electricity, Die by Electricity
From a longer-term perspective, I would be very curious to see how Nio stock plays out. With Chinese leaders openly supporting their nation’s EV machinery, NIO could be a dangerous threat.
Currently, Tesla enjoys its status as a chic, modern and luxurious EV brand. But with the cheapest Model 3 selling for around $35,000, the company leaves itself vulnerable to competition. And frankly, no one can compete with Chinese companies when it comes to undercutting.
After all, what brand cache does Tesla have in the end, anyways? It doesn’t have the pedigree of Ferrari (NYSE:RACE) nor the everyman approachability of Ford. Granted, Tesla provides attractive vehicles on the electric platform. But now, companies like Nio have proven they can match Tesla on looks and technology.
Moving forward, Nio can potentially deliver the same attributes of luxury EV makers but at a much lower price. Essentially, the troll will become the trolled. That’s the allure and the pitfall of the EV market. But if you’re going to compete here, I think it pays to be Chinese.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
