With Nio (NYSE:NIO) growing quickly and launching promising innovations involving batteries, I believe that the company could become highly successful. But given the huge valuation of Nio stock, I would wait for a meaningful pullback of the shares before buying them.
Nio appears to have developed high-quality vehicles. But importantly, I have not seen any signs that they are outstanding or that they have captured consumers’ loyalty and imagination the way Tesla’s have. As a result, I believe that it’s still too early to say whether Nio is the next Tesla.
Strong Growth, Innovative Battery Programs, and Financial Stability
As many others have noted, Nio’s orders have been increasing rapidly. In the third quarter, its sales soared 154% year-over-year to 12,206 and in September its deliveries jumped 133% YOY to 4,708. As of Sept. 30, it had delivered over 26,000 vehicles this year.
Meanwhile, I’m very impressed with the company’s battery programs. According to a Seeking Alpha columnist, Nio has “successfully deployed…battery swapping technology” and “is one of few EV companies” that has done so. The technology could eventually allow recharging EVs to become as fast and convenient as refueling conventional automobiles are now, the author indicated.
And in a related initiative, Nio has launched a battery-as-a-service, or BaaS, program. Under BaaS, the financial terms of purchasing an EV from Nio are very similar to those of buying a gasoline-powered vehicle. Specifically, the price of Nio’s vehicles drops by $10,000 and consumers pay $145 per month for the battery. That $145 per month fee is reportedly equal to the cost of gasoline for the average commuter in Shanghai, China.
Using sales of Nio stock, and large investments by Tencent (OTC:TCEHY) and the Chinese province of Hefei, Nio has solidified its financial position. When I was extremely bearish on Nio stock earlier this year, I thought that the automaker would not have enough cash to survive. Clearly, I greatly underestimated the extent to which Tencent, Hefei, and Wall Street investors were willing to back Nio.
Nio Is Turning Out High-Quality EVs, But May Not Become the Tesla of China
According to J.D. Power, Nio’s vehicles have given their owners, on average, fewer problems than any other EVs available in China, including (by a small margin) Tesla’s vehicles. That’s an impressive achievement.
However, the one review of Nio’s vehicles that I was able to find was not totally positive. TopGear wrote that Nio’s ES6 vehicle, its most popular offering, ” is a heavy thing” and “you can feel that heft in the way the ES6 rides and steers.” The website also cited “loose body control that sees it bounce its way along somewhat inelegantly.”
On the positive side, TopGear was very upbeat on the vehicle’s powertrain, acceleration and interior. It concluded that “The Nio ES6 is a good car..{and} shows a lot of promise for Nio’s future.” But it added that the vehicle is “not quite there yet” and “In many respects it’s on par with competition from Europe.”
The Bottom Line on Nio Stock
Nio’s vehicles likely have what it takes to remain competitive in the Chinese EV market, especially since they are meaningfully cheaper than those of Tesla. Additionally, many consumers and businesses are likely to be drawn to Nio’s vehicles by the company’s battery programs.
Still, Nio is trading at a market capitalization of $34 billion, versus Honda’s (NYSE:HMC) market capitalization of $42 billion. For Nio to justify its current valuation, it will likely have to improve its vehicles and rise to the top of the highly competitive Chinese EV market.
Since the latter feat will be tough to accomplish, I don’t think the risk-reward ratio of Nio stock is positive at these prices. Moreover, I believe that many high-flying stocks, including Nio, will likely slump again as they did at the beginning of September.
Consequently, I would advise investors to wait until Nio slumps to the $18-$20 range before buying its shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
