It took me a while to warm up to Nio (NYSE:NIO). My colleague Bret Kenwell shares my thoughts on investing in the electric vehicle (EV) carmaker. He said it takes a lot of money to build a new auto company into a profitable entity. But true as this may be, Nio has faced several headwinds this year. In fact, prior to receiving some timely funds from the Chinese government, Nio was charging headlong into bankruptcy.
That’s why, when I wrote about the company a month ago, I said that it was now going to be judged by a different standard. What I meant by that was that with bankruptcy off the table, Nio has to show investors that it will be a long-term player in the EV market.
What I didn’t mean was that investors need to start trading Nio based on news about Tesla (NASDAQ:TSLA). The specific issue I’m referring to is the news that Tesla is planning to debut a $25,000 EV in three years.
The EV Market Is Getting Juiced Up
If you haven’t heard, Tesla held a Battery Day event and the company pledged to revamp and upscale its battery cell production. For those that are so inclined, the manufacturer went into detail about the technology behind the improvements. The upshot for investors is that, if Tesla is successful they will be able to lower the cost and significantly extend the range of their electric vehicles.
Tesla’s Model 3 is the most popular EV in China. So this news is seen (by some) as a potential existential threat to Nio.
However, I can’t get that excited about something that may or may not happen in three years. And I would advise you to not get that hung up on it either.
Separating the Lock and the Key
Nio takes a different approach to the battery issue. And how to handle the battery is central to making EVs a practical reality. The battery is the key that unlocks the power of an electric vehicle. The battery swap model separates the lock from the key.
For China, this process of centralized and shared battery charging, storage and dissemination is being done out of necessity. The country lacks the fast-charging infrastructure to keep up with demand for EVs.
Nio, along with multiple Chinese companies, has adopted this model. In August, Nio introduced its battery-as-a-service (BaaS) initiative. This allows Nio to sell the electric cars separate from the battery. From the company’s press release:
“BaaS users can subscribe to battery packs of various capacity according to their needs and pay on a monthly basis. BaaS users are also entitled to NIO’s Power Swap and flexible battery upgrade services, as well as the national NEV subsidies and purchase tax exemption enjoyed by users who have purchased batteries.”
The Right Reason to Buy Nio Stock
At this time, Nio is not a global car company. The company has intentions to start selling vehicles in Europe, perhaps as early as the second half of 2021. And the real prize for Nio would be the opportunity to sell its cars in the United States. But at this time, the company has no timetable under which that would happen.
That means, for now, Nio is strictly a Chinese car company. That’s not so bad. China has one of the largest EV markets in the world. And now that its liquidity issues are behind it, Nio is holding its own. In the first eight months of 2020, Nio has delivered 21,667 cars. And the company offered guidance of a record 5,000 vehicles being delivered in September.
And that’s about as simple as it gets. If Nio continues its upward delivery trend, then the stock will continue to be a strong buy and its prospects for international expansion look good. If it can’t, then you may have to start reconsidering holding a long-term position.
But no matter what you do, look at Nio for the news it’s generating, not what its competitors may do three years from now.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.