Ordinarily, I would tell someone who would buy a stock that increased by more than 1,000% since the start of the year that they should seek “professional help” from a therapist. I am prepared, though, to throw caution to the wind when it comes to Chinese electric vehicle maker Nio (NASDAQ:NIO). Yes, for me, Nio stock is one of those rare exceptions.
Like most people, I am a sucker for an underdog story, and few companies defied the odds quite like NIO.
What a Comeback !!!
Last year, Nio stock traded at $1.39 as the company faced bankruptcy. It got a financial bailout valued at about $1 billion from “state-owned entities” based in Hefei, China, where it makes its vehicles. Chinese behemoths Baidu (NASDAQ:BIDU) and Tencent (OTCMKTS:TCEHY) are among NIO’s investors. The Chinese Communist Party likely approved the deal.
Unlike most of the hundreds of EV startups in China, Nio produces and sells vehicles such as the ES6, which the BBC’s “Top Gear” show said in a recent review performed surprisingly well.
“The interior is comfortable, spacious, and feels well-made, the infotainment looks and feels slick and the powertrain is smooth, quiet and makes this 2,345kg car properly quick,” the program’s website says.
Sure, money-losing Nio’s valuation is ridiculous, but bulls can ignore that for now.
Nio Stock’s Insane Valuation
With a market capitalization of around $75 billion, NIO is now worth as much as the combined capitalizations of Ford (NYSE:F) ($35 billion) and Fiat Chrysler (NYSE:FCAU) ($36 billion), companies with histories dating more than a century. General Motors (NYSE:GM), founded in 1908, is valued at nearly $60 billion. Only three other automakers — Tesla (NASDAQ:TSLA), Toyota Motor (NYSE:TM), and Volkswagen (OTCMKTS:VLKAF), are valued higher than Nio.
Wall Street analysts believe NIO shares have run out of gas. Their average price target on NIO stock is $40.51, roughly 13% below where it currently trades. I am not ready to throw in the towel on NIO stock just yet. NIO is a useful tool for the Chinese Communist Party, under international pressure to crack down on pollutants linked to global warming.
Subsidies
“Originally, the Chinese plan had been to remove NEV subsidies by the end of 2020. However, in March of this year, following the post-Covid-19 economic recession, the decision was made to extend them,” according to CleanTechnica. “The revision now includes consumers who buy new electric vehicles through 2022 and also contains provisions for tax exemptions on purchases for 2 years.”
China aims to have alternative fuel vehicles account for 20% of all automobile sales by 2025, a huge jump from their current level of 5%. The Communist Party would prefer that a local company like Nio plays a prominent part in solving the vexing problem of air pollution instead of a foreigner. Nio is too important for China’s image to allow to fail.
So, in conclusion, I think NIO stock will trade higher and defy the naysayers. Unfortunately, like all bubbles, this one will burst though it may take a year or two for it to happen. It’s best to wait for a 10 to 20 percent pullback before pulling the trigger. Anyone who buys NIO shares, though, better brace themselves for a bumpy ride.
On the date of publication, Jonathan Berr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.
