Electric vehicle stocks are scorching hot this year with the industry getting plenty of leadership from Nio (NYSE:NIO) and Tesla (NASDAQ:TSLA). With the July 9 gain of 13.12% on volume that was almost quadruple the daily average, Nio stock more than doubled in just a month.
The Tesla sympathy play is real and it’s not confined to Nio stock. Workhorse Group (NASDAQ:WKHS) more than quadrupled in a month. Nikola Motor Co. (NASDAQ:NKLA), a company that few if any on Wall Street have a handle on, is up more than five-fold this year.
As for Nio, the stock is up more than 11-fold from its 52-week low. Some of that move is attributable to improving what was once a flimsy balance sheet. For example, the company announced on July 10 that it procured a $1.48 billion line of credit from a consortium of six Chinese banks.
NIO has raised over 10 billion yuan ($1,427,470,000) of funds so far this year by selling convertible notes, obtaining strategic investments for NIO China and offering American depositary shares,” reports Gasgoo, a Chinese auto market media digest. “The newly-approved credit line further indicates that NIO has been solved its potential cash flow issue and regained the market’s confidence.”
The last part of that quote amounts to some cheer leading for the home team. But the fact remains that Nio is financially sturdier than a year ago.
Sales Data Impresses, But Competition Lurks
Some of Nio’s recent bullishness is rooted in solid fundamentals. In the second quarter, the company delivered 10,331 vehicles, beating its own guidance. Last month, Nio delivered 3,740 vehicles, a monthly record good for 179% year-over-year growth.
In any month, growth like that is stellar. But Nio’s June report is impressive since came against the backdrop of weakness in the broader Chinese automotive industry. The China Passenger Car Association (CPCA) said sales in the world’s largest auto market dipped 6.5% in the sixth month of the year.
Add to that, the CPCA reported that sales of electric vehicles – Nio’s point of emphasis – plunged 35% in June. This marked the 12th straight month of decline. Ongoing weakness in the Chinese EV market can only be ignored for so long because this is the only country Nio sells its cars.
Something else that can’t be ignored is Tesla’s increasing share of the Chinese EV market. Year-to-date, that share has jumped to 21% from just 2% in 2018, according to ARK Investment Management. Like any other competition, the Chinese EV market has winners and losers. Tesla is clearly winning because Elon Musk’s company three Chinese rivals – Byton Ltd., Bordrin Motors and Jiangsu Saleen Automotive Technology – are out of business.
Bottom Line on Nio Stock
The same fate probably won’t befall Nio because founder William Li saw the Tesla threat and the problems it would cause for local rivals. Nio could have difficulty challenging Tesla on brand cache.
Given the price points Tesla sells cars, it’s considered a luxury brand in the U.S. In China, it’s not trying to get buyers out of Fords or Toyotas, though it will happily take those customers. It’s trying to get drivers out of BMWs and Mercedes.
Chinese consumers, which have long had an affinity for foreign luxury goods, ascribe a level of prestige with Tesla. They may not assign that prestige to Nio even though the ES8 is comparably priced to the Tesla Model X.
Over the near-term, EV market bullishness can drag Nio stock higher. But over the long haul, the company needs to address competitive threats and the specter of a shrinking EV segment in its home market.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
