Electric vehicle (EV) company Nio (NYSE:NIO) is having an amazing year. In fact, Nio stock is on a parabolic run, as its shares have soared 10-fold in recent months.
It’s been a remarkable turnaround for the company. A year ago, Nio stated its intention to become a Tesla (NASDAQ:TSLA) killer. However, Nio’s cash shortage and the novel coronavirus combined to put the Chinese company on life support earlier this year.
Now, though, Nio has secured emergency financing, its vehicle sales are climbing strongly again, and the stock is on the verge of new all-time highs. At this point, is it time for investors to take profits on NIO stock?
Many bulls argue that Nio still has more room to run, and that buying its shares now is like buying Tesla stock back in 2013. However, that analogy is wrong; NIO stock is nowhere near as compelling as Tesla’s shares were. Here’s why.
Nio Isn’t Comparable to Tesla Seven Years Ago
Bulls love to make the argument that buying Nio now is like getting in on the ground floor of Tesla back in 2013. At that point, you may recall, Tesla only sold a significant number of one model, and many investors viewed Tesla as a fad.
Nio, similarly, is still at the early stages of development and supposedly has a huge runway ahead of it. Tesla stock would go on to jump 50-fold between 2013 and today. Obviously, if Nio stock does anything like that, it would be a sensational investment.
However, further inspection shows that the two companies aren’t that similar. For one thing, consider the size of the two businesses.
In 2013, Tesla generated $2 billion of revenue. Nio, by comparison, has brought in $1.4 billion over the past 12 months. That’s not too bad. But look at the company’s margins.
Nio has lost money merely on the production of its cars; its gross loss on the production of vehicles that it sold over the past year came in at $46 million. That’s before salaries, overhead, marketing, and legal expenses.
Tesla, for all the criticism it gets, has always made a gross profit on its cars. In 2013, Tesla brought in nearly $500 million of gross profit on its $2 billion of sales, earning a respectable 25% margin. Elon Musk has always known that Tesla should sell its cars for more money than it costs to manufacture them.
Nio Is Not The Market Leader
One huge advantage for Tesla in 2013 was that it was the first to the EV party. The major entrenched automakers hadn’t seriously prioritized EVs yet. Thus, Tesla was able to grab a ton of attention and free marketing.
Nio will enjoy no such benefit, as China already has an established EV market. In fact, take a look at the recent stats. The company with the largest share of the Chinese EV market is none other than Tesla itself. Through the first half of 2020, Tesla had a market share of more than 20% in China, and it has sold 50,000 vehicles there over the past year.
As you can see, Nio does not have the first-mover advantage in China. And its cash shortfall earlier this year greatly curtailed its ability to grow its operations and maintain its marketing activities. Further, even if Nio later becomes the top EV maker in China, it will face brutal competition.
As it stands, Tesla, the sector’s current leader, sells fewer than one out of every four EVs bought in China. That shows just how many EV brands are already competing in the nation.
Nio’s Shareholders Face More Corporate Governance Risk
Tesla’s unusual corporate decision-making method is well-known. Bears love to hammer the company for its unorthodox decisions and Musk’s occasionally bizarre tweets. However, while Tesla has pushed the envelope in some regards, U.S. regulators will force it to follow America’s rules.
The Securities and Exchange Commission (SEC) intervened and placed some limits on Musk’s social media, for example, after his misleading tweets about a pending $420 per share buyout of the company back in 2018.
However, governance risk rises to a whole new level when dealing with Chinese companies. China has long prohibited foreign investors from buying the shares of many of its firms directly.
As a result, investors have to buy shares of holding companies listed in third-party jurisdictions such as the Cayman Islands. These holding companies claim to have stakes in the underlying companies’ assets. That’s great in theory, but it’s often unclear if this structure will hold up in court in the case of fraud or other negative developments. As we saw with Luckin Coffee (OTCMKTS:LKNCY) earlier this year, there’s not much recourse for American investors if something goes wrong.
More broadly, China refuses to allow internationally-accepted auditors to review local companies’ filings. This causes us to have to scrutinize Chinese firms’ numbers more carefully.
That issue becomes very relevant at times, such as early this year when it was unclear if Nio would be able to pay the interest on its bonds or not. There’s nothing wrong with trading Chinese stocks. But beware that there’s more risk of holding a Chinese stock as a long-term investment than owning shares in the U.S. or other markets with higher regulatory standards.
The Verdict on Nio Stock
All told, investors are paying far more for Nio’s shares now than they did for Tesla back in 2013. As recently as the spring of 2013, Tesla had a market capitalization of just $5 billion. Yet Nio’s market capitalization is already up to $30 billion despite offering investors far less in terms of results.
EV stocks are incredibly hot. In this frothy environment, Nio’s shares could continue to move higher.
I certainly wouldn’t want to short NIO stock right now. However, at the end of the day, NIO stock has a $30 billion valuation and delivered fewer than 5,000 vehicles last month.
That’s simply absurd. The stock’s owners should enjoy its momentum trade as long as it’s working. But don’t lose sight of the company’s underlying, weak fundamentals. Nio will undergo a massive correction when the market winds shift.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.