Two years ago, Nio (NYSE:NIO) stock was a very troubled electric car company.
Nio was selling the equivalent of an electric Cadillac in a society that didn’t drive them. It needed a bailout that tied it to government-controlled JAC Motors.
But much to my surprise, the bailout worked. JAC solved Nio’s production problems. Its design proved attractive to high-ranking cadres. The stock was a rocket ship in 2020, riding the Chinese electric vehicle bubble. Shares peaked at nearly $67 in January.
Since then, the stock is down. I saw the dip and warned readers away. But I may have been wrong. While shares are down since April 13, it’s only by 6%. Given the government’s ongoing crackdown on technology and fast living, that counts as a win.
Nio was founded by William Li. He styles himself a Chinese version of Tesla (NASDAQ:TSLA) CEO Elon Musk. The stock came public in September of 2018, promising to upgrade buyers’ lifestyles with Nio Houses that acted as clubs for upwardly mobile workers.
But there were big production problems. Cars were recalled after batteries caught fire. Even the support of Tencent Holdings (OTCMKTS:TCEHY) couldn’t solve these problems. It seemed like the story was over.
Then came the government. They were there to help. During the worst of the pandemic, Nio got a $1.4 billion investment from the Hefei government, integrating it into the local supply chain. The deal made no economic sense, but it solved the scaling problem. Nio could focus on technology and marketing.
The government aid sent Nio stock to the moon. I was skeptical about investors getting back in bed with the Chinese government. Apparently, they felt differently.
Now Goldman Sachs thinks Nio stock could approach its all-time high and reach $56 per share.
The manufacturing problems seem to be in the past, and so too the quality problems. The company has a new sedan called the ET7, modeled on the Tesla Model S but getting up to 600 miles per charge. It also has self-driving features built on lidar. This is a technology common to other electrics but which Tesla, notably, has rejected.
Nio quarterly sales topped $1 billion for the first time last December and have stayed high. Third quarter sales were double those of a year ago. It should do $5.6 billion in business this year. Sales could hit $9.4 billion next year. Nio’s market cap of $59 billion is a little over 6 times those sales. NIO stock could soon sport that most elusive feature of all, profit. Tesla stock sells for over 20x its current sales.
China’s government takes a Korean approach to new industries. It subsidizes new industries heavily. It lets many companies compete. Then it consolidates into a few companies that can take on the world. JAC Motors is one of those companies, thus so is Nio.
The Bottom Line for NIO stock
The same Wall Street investors who shunned Tencent after the government cracked down now pound the table for Nio stock after a successful bailout.
NIO stock remains tied to the Chinese economy as well as the government. Local governments and property developers face huge debts. There is a looming energy shortage this winter. There are lifestyle crackdowns that are going to hurt productivity. The government of Xi Jinping is distracting people from that by threatening Taiwan.
So long as William Li is favored in Beijing, however, Nio is safe. I think there’s a floor under the stock. But there’s a ceiling, the Chinese economy, and $56 can wait.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.