Nio (NYSE:NIO) occupies an interesting place in the electric vehicle (EV) arena. It’s not Tesla (NASDAQ:TSLA) and probably won’t ever be, but it’s also far less controversial than Nikola (NASDAQ:NKLA). Comparisons aside, investors aren’t complaining because Nio stock is closing on a five-fold year-to-date gain.
The EV space is now home to a dizzying array of residents, many of which are fresh on the scene via recent initial public offerings (IPOs) or mergers with special purpose acquisition companies (SPACs). By the standards of this industry, Nio is seasoned relative to the newcomers. In a nascent field, such as electric vehicles, experience counts for something, but fundamentals are crucial. Nio’s fundamentals are increasingly sturdy.
These days, being a Chinese EV manufacturer, as Nio is, carries some gravitis, but companies have to execute to earn investors’ interest. Nio is doing that. The company is fresh off a second quarter in which it delivered 10,331 vehicles and a 139% increase in sales. Analysts are also enthusiastic about the company’s Tesla-esque move into China’s luxury EV segment.
With the China EV market already the world’s largest and now inflecting upward after the recent downturn, we believe NIO is well positioned to take share in the premium segment, having put major emphasis on post purchase customer service, alleviating charging anxiety, and developing a robust software/AI centric vehicle ecosystem,” said Deutsche Bank analyst Edison Yu in a recent note.
China Focus Material for Nio Stock
China is the world’s worst polluter, but it’s trying to shed that dubious distinction and that effort is giving rise to a lucrative EV market. Potentially boding well for Nio and its peers are China’s plans to tighten corporate average fuel consumption targets next year.
In essence, Beijing is prompting manufacturers of internal combustion engine (ICE) vehicles to make those products more fuel efficient while also opening the door for more new energy vehicles (NEVs) to hit the road. Those efforts are paying off because data suggest there will be 3.6 million NEV credits in China this year, which is good news for EV makers like Nio. Add to that, EV adoption in the world’s second-largest economy is getting a lift from the novel coronavirus pandemic.
“Under COVID-19, the Chinese government has taken measures to further promote the growth for electric vehicles, from the continuation of NEV subsidy and with a delay of China 6 emissions standards full implementation, and also the possibility of using 2021 NEV credits to back write off 2020 deficits,” according to IHS Markit research.
Like state governments here in the U.S., China has EV ambitions and targets. It wants clean-running automobiles to represent 20% of the vehicles on the road by 2025. What percentage of that pie Nio commands remains to be seen, but it’s not a stretch to say it will be significant and put the company on the road to profitability.
Betting on Batteries
Nio has another ace up its sleeve: It’s battery as a service, or BaaS offering. In plain English, BaaS is a subscription-based, swappable battery platform that Nio hopes will make its forthcoming EC6 vehicle a more cost-effective option to Tesla’s Model Y.
“BaaS users enjoy an RMB 70,000 off from the car price, for a battery subscription starting from RMB 980 per month, representing lower purchasing and using costs than ICE vehicles in the same premium segment,” according to Nio.
With BaaS, Nio doesn’t necessarily need to prove to investors it’s pilfering market share from Tesla. It merely needs to show the business model is viable and that end users like it. From there, that recurring subscription revenue can bolster and steady Nio’s top line, providing a catalyst for share price appreciation.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
