The Double-Edged Sword of NIO Stock

NIO (NYSE:NIO) gets the U.S. comparison – as seemingly all Chinese stocks do – to a U.S. counterpart. NIO stock is “the Tesla (NASDAQ:TSLA) of China.”

Image showing a Nio store with a glowing logo on the front.
Source: Andy Feng/Shutterstock.com

I’m not so sure I buy that analogy. It certainly doesn’t have a tour de force CEO like TSLA does. And its focus is cars, not hole digging companies, aerospace firms or energy storage manufacturing.

But NIO has come out of the gates pretty quickly. It went from selling 4,000 cars in Q1 2020 to 20,000 in Q1 of this year. NIO also delivered more than 8,000 cars just in June of this year.

Currently the carmaker has four consumer models – one sedan (ET7) and three SUVs (EC6, ES6, ES8). Plus, it has its high-end super sports car, the EP9.

NIO Stock Has Accelerated Quickly

Launched in 2014, NIO stock wasn’t making much headway when it went public in the U.S. in 2018. There has been interest in the Chinese electric vehicle (EV) market as far back as 2008 when Warren Buffett made a big investment in BYD (OTC:BYDDY).

But it was still early days and there were more than 400 start-up EV companies operating in China. Even today there are about two dozen firms making and selling a significant amount of EVs.

The thing is, there are credible estimates that three out of every five cars (60%) sold in China by 2030 will be EVs. That’s an enormous market. And opportunity.

NIO started by pitching its sexy EP9, like TSLA pitched its fancy sports coupe. It was for early adopters that wanted to show off their foresight and status. But there were troubles. And it took a while for NIO to get out of the gate, even as the big money started rolling into EVs and other ESG-friendly investment opportunities.

Also, cooling trade relations between China and U.S. also slowed down NIO stock’s momentum.

EVs Have Plenty of Torque

However, even before the pandemic hit, EVs were cool again as meme stocks started to gain headlines and speculations became extremely popular with new investors. Then the “blank check companies,” a.k.a. SPACs started to launch EVs in the U.S.

The game was on again and NIO was now making serious inroads in its production and quality. They also added new models to compete with TSLA in China.

The one thing the Chinese are aware of is that the U.S. isn’t thrilled with their country’s economic rise and growing global influence. China is now focused on building out its own industries and supporting the growth of its domestic economy rather than depending on exports to the U.S. and Europe.

NIO is one of the corporations that represents far more than an EV company in China. It’s a symbol of world-class consumer-focused engineering and production from a Chinese company.

And when you have a middle-class population that’s the size of the entire population of the U.S. (and growing), a flagship EV company is a valuable commodity.

FOMO Frenzy

But all this excitement and activity in this toppy market took NIO stock on quite a ride. In the past year, NIO stock’s trading range is between $11 and $67. Today, it’s about 37% off its 52-week highs, and it sports a $68.5 billion market cap. Ford (NYSE:F) has the best-selling pickup truck in the U.S. and its market cap is $55 billion.

OK, the fact is, I’m cheap. And after decades of reporting on the markets, I’m cynical, too.

NIO isn’t profitable yet. And its production is still very small. I think TSLA is wildly overvalued, so it may not come as a surprise that I think NIO stock is overvalued here as well.

But NIO has real possibilities. And it may well become an important player in China – and potentially beyond – in coming years. But that doesn’t mean I’m going to pay a crazy premium for it.

Given the volatility of the markets now, NIO stock is an ideal buy in the mid- to upper 20s. Maybe low 30s for long-term investors.

On the date of publication, GS Early did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

 GS Early has been an award-winning financial writer and editor for nearly three decades, working with many of the leading financial editors and publishers during that time. He’s seen a few things and heard plenty.


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