What is Your (New) Ceiling for Nio Stock?

For the past year, I’ve written several articles that express my negative opinion of Nio (NYSE:NIO). It’s not that I don’t believe in the long-term future of the electric vehicle (EV) market. Nor is it that I find something fundamentally displeasing about Nio’s cars. I just found Nio stock to be a risky investment. And I had reasons for that.

Nio Stock May Actually Be Worth the Gamble This Time
Source: xiaorui / Shutterstock.com

First of all, the company was strapped for cash. As recently as January, the company acknowledged it did not have enough operating capital to make it through the year. They had to borrow money to make their payroll. And there was that not so small issue of the novel coronavirus in the company’s home country.

It’s not like they haven’t given investors a reason to doubt their viability.

But Nio stock has surged in the last month. At one point Nio stock climbed over 80% as investors rode a wave of positive sentiment in the electric vehicle market. And it didn’t hurt that the company appeared to have put its liquidity problems in the rear view mirror, courtesy of the Chinese government.

In my most recent article about Nio, I asked investors what their ceiling for Nio stock was. Of course, I didn’t imagine that the stock price would more than double. And even after a pull back, the stock is trading at nearly $7 per share ($6.86 as of this writing). So here we are, and I’m left to ask how high can Nio stock go now?

Where I Got It Wrong

In my last article, I wrote that Nio would be hurt by China scaling back on its subsidies. Shortly after the article dropped, I was corrected by JoAnn Yamani, Nio’s Director of Communications. Yamani showed me why Nio would continue to benefit from the subsidies because of their use of battery swapping technology. This is an excerpt from that document:

The “Notice” also set a pre-subsidy price limit of 300k RMB (42.3k USD/39.3k EUR/34.3k GBP) on electric vehicles. To promote “battery swap” technology, vehicles capable of battery swapping are exempt from this price limit.

More on that in a second.

The continuation of the subsidies combined with the Chinese government’s $1.4 billion deal through the city of Hefei will give Nio ample liquidity in the short term. My InvestorPlace colleague Will Ashworth, describes how this cash infusion from the government has lifted the confidence of Nio. This point about liquidity was also made by Steve Hanley in CleanTechnica:

It (Nio) enjoys significant backing from the Chinese government, which will help it weather the coronavirus crisis and the ever shifting sands of official government policy.

This Technology is Giving Nio a Charge

The electric vehicle market is getting crowded. One thing that is helping Nio to stand out is its focus on battery swapping technology. Remember, the Chinese government has specifically made an exception in their subsidy policy for companies that are using battery swapping technology. Tesla (NASDAQ:TSLA) has made a point of dismissing this technology.

On the other hand, Nio considers this a key part of what it terms its “chargeable, swappable, upgradeable” user experience.

As Hanley describes it:

Not only do drivers get a fully charged battery, they also get a complimentary inspection of their car’s electric powertrain. Battery swapping also means customers always have the latest battery technology available to them and they can choose to upgrade to a larger, more powerful battery at any time. Drive in, drive out. Easy!

What’s Next for Nio Stock?

I can’t deny that Nio is not the sinking ship that it was. But I also don’t agree completely with Matt McCall’s bullish outlook for Nio. Let me be clear, I understand his argument. I just don’t agree with it. Because McCall argues that China has invested billions into their EV infrastructure. That’s true.

However part of those billions has been invested in Nio. Which means ultimately, the Chinese government will be calling the shots. So while I agree that there is a bullish outlook for electric vehicles in China, it’s unclear what Nio’s role is in that future. This is particularly curious as Nio becomes part of the mainstream of Chinese car operations.

But in the short term, Nio has ample funding and is showing improved vehicle delivery numbers. It’s even projecting to have record numbers in the second quarter. Is it a double-digit stock? At this point, I can’t bet against it. But an analyst from Goldman Sachs (NYSE:GS) just issued a downgrade for Nio despite raising its price target. So obviously there’s at least some sentiment that the stock is overheated and perhaps a beneficiary of a bullish sentiment for all electric vehicle stocks.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/what-is-new-ceiling-for-nio-stock/.

©2023 InvestorPlace Media, LLC