Nio Inc. (NYSE:NIO) has a few important strengths and positive catalysts. But at the same time, the company is facing tough challenges and has critical weaknesses, while the valuation of NIO stock is not particularly attractive compared with that of its peers.
Given these points, along with the powerful strengths of one of Nio’s competitors, XPeng (NYSE:XPEV), I recommend that investors own XPEV stock instead of Nio’s shares at this point.
Along with Li Auto Inc. (NASDAQ:LI), the three stocks are among the top five holdings in KraneShares MSCI China Clean Technology ETF (NYSEARCA:KGRN), a 55-stock exchange-traded fund with a 0.79% expense ratio. That fund is down 23.6% in the year to-date, while NIO stock is off a whopping 44.5%.
| Ticker | Company | Current Price |
| NIO | NIO Inc. | $18.85 |
Nio’s Challenges and Weaknesses
There’s evidence that Nio is facing tougher production issues than either of its two peers, XPeng and Li Auto. (All three companies are China-based start-ups whose only products are electric vehicles.)
First, Nio’s main factory is located several hours’ drive west of Shanghai, and the company’s headquarters are located in that city. In recent weeks, Shanghai has undergone harsh anti-coronavirus lockdowns, and for about a week in April, Nio was forced to suspend its production due to supply chain issues.
And while Nio’s production “gradually” rebounded in May, its deliveries and year-over-year delivery last month still lagged those of XPeng and Li by considerable amounts.
Specifically, Nio, XPeng and Li delivered 7,024, 10,125, and 11, 496 EVs, respectively, in May. The companies’ year-on-year growth rates during the month were 4.7%, 78%, and 166%, respectively.
It may take at least a month or two for Nio’s production to catch up with that of its peers. During that time, investors and the Street could become impatient with Nio, causing Nio’s shares to meaningfully underperform those of XPeng and Li.
Further, as I’ve noted in past columns, Nio’s EVs tend to be more expensive than XPeng’s. Given the slowing economic growth in both China and Europe, that discrepancy is likely to become more of a problem going forward. Another one of Nio’s weaknesses is that XPeng’s advanced driver assistance systems are more advanced than those of Nio.
Finally, it appears to me that, generally, English-language reviews have given XPeng significantly more praise and less criticism than Nio.
Nio’s Strengths
The automaker has developed an extensive battery swapping program that should make driving its EVs, in some ways, easier, less worrisome and more convenient than those of its competitors.
As well, Nio has developed an extensive presence and a positive brand name in China, while it entered Europe last year and is reportedly looking to soon establish a foothold in the U.S. If Nio can gradually gain meaningful share of those markets, NIO stock will be well-positioned to soar over the long-term.
On the valuation front, there isn’t very much difference among the three companies: NIO stock has a trailing price-sales ratio of 5.35, while the trailing P/S ratios of XPEV stock and LI stock are 6.2 and 4.5, respectively.
Given XPeng’s advantages over Nio in production, ADAS, and reviews, I recommend that investors own XPEV stock instead of NIO stock.
On the date of publication, Larry Ramer owned shares of XPEV stock.
