Nio May Be Shooting Past Its Fundamentals

There’s no question that electric vehicles have dominated the current market environment. Indeed, if our financial indices only included EV names like Nio (NYSE:NIO), no one would think that we’re mired in a global crisis. However, with the recent surge in Nio stock, many are wondering if shares have hit bubble territory.

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

On the surface, this criticism appears unfounded. For one thing, many analysts are enthusiastic about Nio stock. In particular, Paul Gong of UBS, who has long been bearish on the EV maker, upgraded his rating to an equivalent of “hold” from “sell.” Previously, Gong had a lowly price target of $1.

Naturally, the dramatic change of heart caused an equally dramatic rise in Nio stock.

But that’s not the only tailwind boosting shares. At its core, Nio’s management team wants to establish itself as an innovator, not just a Tesla (NASDAQ:TSLA) copycat. To that end, proponents surely love the company’s battery as a service model. As contributor Bridie Schmidt explains:

Instead of the upfront cost of the battery, drivers buying one of Nio’s handful of smart and sleek electric cars who take up the “battery-as-a-service” (BaaS) option will pay a RMB 980 (about $A198) monthly fee that includes a 70kWh battery.

In return, they benefit from the ability to change a depleted EV battery for a charged-up one in a matter of minutes – a boon for those who are after the convenience of not having to wait for a battery to recharge, such as on a long distance trip.

Finally, Nio stock is among the most popular investments on Robinhood. Thanks to an influx of traders, it’s not surprising this name caught fire.

Nio Stock Is Stretching Credibility

Admittedly, I was late to the game regarding electric vehicles. But having examined the pros and cons of EVs versus combustion-engine cars, I can see why so many have gone “digital,” so to speak. Mainly, over the long run, EVs are cheaper due to low “fuel” costs and lesser maintenance expenses due to the EV platform’s inherent reliability (as in fewer moving parts).

Likely, the novel coronavirus pandemic boosted the case for EV investments like Nio stock. Because electric cars are so reliable, you don’t have to worry about getting an oil change. That small detail alone is huge when people are placing a premium on contactless service.

However, with Nio stock around $20 (equating to a market capitalization of over $24 billion), I’ve got to wonder if shares aren’t stretched. To be fair, I understand the bullish fundamental argument for NIO. Back in the fourth quarter of 2019, the company delivered 8,224 vehicles, up 3% from Q4 2018. Yet shares only traded for an average of $2.

Nio vehicle deliveries vs. NIO stock
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Source: Chart by Josh Enomoto

In hindsight, we know that this was grossly undervalued. Fast forward to Q2 2020, Nio delivered 10,331 vehicles, up nearly 26% from Q4 2019 figures. This confirmed that China’s consumer economy had recovered from Covid-19, resulting in Nio stock skyrocketing.

Still, I’m not entirely confident that the present valuation is sustainable and here’s why.

Luxury EVs Are Terribly Expensive

As you can imagine, California is home to several Tesla drivers. When I see so many of these EVs on the road, I don’t question the fiscal sustainability of it all. California is home to multi billion-dollar companies, making us very wealthy.

On a GDP-per-capita basis, residents of the Golden State generate $58,619, up nearly 16% from the U.S. GDP per capita. Considering that the Tesla Model 3 starts at around $38,000 and the Model Y from around $53,000, the popularity of these EVs make sense: people can afford them.

However, I don’t get the warm and fuzzies from China. According to one report, the average annual salary in Beijing (China’s top-earning city) is 145,766 yuan. Roughly, this translates to $21,174. In another study, Beijing’s GDP per capita is around $30,000.

These are numbers that are in line with average consumer spending power in big Chinese cities. But the red flag is that Nio’s EVs are very expensive, even compared to Tesla’s cars. For instance, the ES6 SUV is around $52,000. The larger ES8 is around $67,000.

I don’t think many of the folks that are gambling on Nio stock appreciate just how expensive these cars are. For instance, leasing a $60,000 car with a modest down payment will lead to a monthly bill of around $800. Frankly, I don’t see how that’s sustainable on a $30,000 annual income, which is $2,500 monthly.

True, the battery as a service model takes some of the pain off the sticker price. But you don’t see too many Americans tooling around in cars that cost more than $40,000. I have a hard time believing that the average Chinese consumer can do so.

Wait for a Better Price

Despite the concerns for the above, I like Nio stock and the broader EV revolution. Over time, it’s possible that the current valuation can be sustained for the long run. But right now, I have my doubts.

Between 2018 to 2019, battery electric vehicles slipped 1.2% in China. To me, that suggests that the consumer market has temporarily hit a peak point during normal, non-pandemic times. With the added pressure of the Covid-19 crisis, along with sharply rising geopolitical tensions between the U.S. and China, getting too heavily involved in market emotions could end up going badly.

Therefore, the smart play is to take some profits off the table. If you’re bullish on Nio stock, I don’t think there’s any harm in waiting. But there could be a lot of harm in diving in right now.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

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.

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