For investors in 2020, growth is all that matters. That’s one of the reasons why Nio (NYSE:NIO) stock is on such a run.
Investors don’t seem to care whether growth is profitable. They don’t even care if it’s Chinese growth or subsidized growth. If it’s growth, they pay.
Through July, Nio, the Chinese electric car company, has delivered 17,702 cars this year, more than double from last year. At its current rate of growth, that could mean sales of $1 billion for the full year.
Nio opens for trading Aug. 10 at $14.21 per share. That’s a market cap of almost $17 billion. No, there are no profits. You want profits?
The Bull Case
Nio bulls look at its stock chart and its production figures. They call its growth outlook enticing. They like the support it gets from China’s government.
They also like the Musky smell of a high-end electric car maker. Musk as in Elon, as in Tesla (NASDAQ:TSLA).
Bulls are also bidding up shares of Nikola (NASDAQ:NKLA), another newly public electric car company that makes Nio look like General Motors (NYSE:GM). Nikola has a market cap of nearly $14 billion on a single financial report delivered alongside its S-1.
Analysts who looked at the numbers expected Nikola (that’s Tesla’s first name, get it?) to drop like a stone after its IPO. It didn’t. Since Nio has the cash needed to keep going for a while, I guess that makes it a better investment.
The problem with that is, as the National Park Service notes, pushing your friend down in the face of a bear attack won’t save you. Even if you don’t like your friend.
In this analogy Nikola is Nio’s friend and Tesla is the bear. It should also be noted there are a bunch of bears chasing after Tesla. Every major car company from Toyota (NYSE:TM) and Ford (NYSE:F) to Volkswagen (OTCMKTS:VLKAY) has a full line of electrics in the works.
Why, Nio Why?
I have been covering Nio here for two years. I called it an interesting speculation in late 2018. I worried about its relationship to the Chinese property bubble a few months later. By March I was watching the smart money bail and saying stay away.
The reason we’re still here is Tencent Holdings (OTCMKTS:TCEHY). That’s the rich and deeply connected Chinese tech company (best known for WeChat) that has backed Nio founder William Li from the beginning. Tencent continues to invest in Nio, and helped it gain $2.6 billion in new debt this year, $1 billion directly from the government.
Without the government support, Nio would be dead in the water. Nio cars are made by JAC Motors, a state-owned company. Its loans come from the state of Hefei, where JAC is located. Nio looks set to be a high-end name plate for China Inc. electric cars. Its ES6 coupe, which starts delivery in September, will cost more than the equivalent Tesla. Tesla has its own factory in Shanghai.
InvestorPlace’s Muslim Farooque underplays the bear case. Nio needs a strong second quarter and a cooler political climate, he writes. It’s time to tap the brakes.
The Bottom Line
I say it’s time to turn around and head out of there.
Nio has been here before.
Soon after it came public, Nio stock shot up in price also on optimism it could be the “Chinese Tesla.”
When it became plain that was not the case, Nio stock sold for under $1.50 per share. This was last September.
It’s true China is now backing Nio’s play. But that could be pure politics, creating a counterweight to Tesla, which has one-third of China’s electric car market. I don’t mind investing in China, but I’m betting on the Chinese market, not the Chinese government.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
