Nio (NYSE:NIO) stock has bounced back in the past month. Since July 1, shares have rallied nearly 23%, rising from $2.67/share to $3.28. Negative investor sentiment has pulled back, with speculators reentering NIO stock.
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But with heavy competition, Nio has its work cut out for them. Can the company become a viable competitor to Tesla (NASDAQ:TSLA) and rival China-based EV makers?
While shares have seen a “dead cat bounce” no doubt, I continue to believe NIO is not a buy. Short-term, bits of good news could boost the Nio stock price. But long-term, there are better opportunities elsewhere. Here’s my thesis for why investors should look at the facts and avoid Nio stock.
Financial Maelstrom Ahead
The EV maker announced on July 10 that it delivered 3,553 of its ES8 and ES6 vehicles in the second quarter of 2019. This figure exceeded guidance of 2,800 to 3,000 deliveries. This crumb of good news has driven up the Nio stock price, explaining the pop since early July. However, shares remain far below the IPO price of $6.26 a share, and very far below its all-time high of $13.80 per share.
Is the second quarter delivery news a sign that NIO stock is on the rise, or are these figures irrelevant?
The Q2 delivery numbers seem less impressive compared to Q1 deliveries of 3,989. But with the release of the smaller-sized ES6 model in June, Q3 delivery growth could be huge. There were 12,000 pre-orders alone for the E6. While that model will likely cannibalize sales of the E8, the company is inching closer to critical mass.
To be sure, Nio has a far ways to go before it scales to profitability. As operating losses continue, the company may be entering a financial maelstrom. As I mentioned in my July 5 article, the firm does not have its own manufacturing facilities. Instead, it builds cars at a state-owned JAC Motors factory. The company is obligated to cover the factory’s losses until April 2021. Dependent on equity infusions, Nio continues to be a work-in-progress.
But isn’t it darkest before the dawn? Could investors be getting in at a fantastic price before these headwinds are resolved?
Capital infusions could help it survive long enough to scale. But with the current valuation, much of this potential upside may already be reflected in the NIO stock price.
Valuation Remains a Concern
Nio stock sells at a substantial enterprise value-to-sales premium to its bigger rival Tesla. NIO shares trade at an EV/Sales ratio of 4.4, compared to 2.1 for TSLA. Nio’s operating performance does not explain this discrepancy. Unlike TSLA, NIO shows negative gross margins. Its financing issues make Tesla look like a blue chip. It may be unfair to compare the two companies. Tesla is much further down the path to profitability. But with Tesla’s Chinese “gigafactory” coming on line within the next year, it seems foolish to think that upstart Nio has a shot.
Perhaps protectionist trade policies could give the company an edge on its home turf. With the U.S.-China trade wars flaring back up, as an American company Tesla may face challenges. But NIO is not the only Chinese electric vehicle maker. Large companies such as BYD (OTCMKTS:BYDDF) are already in the space. As InvestorPlace contributor James Brumley mentioned in a recent article, even Alibaba (NYSE:BABA) has thrown its hat in the ring, backing EV startup Xpeng.
As mentioned in my last article on the shares, the Nio stock price gets a boost from being the only Chinese EV maker trading on a major exchange. Competitors like BYD trade over-the-counter. Investors may bid up NIO stock to gain exposure to the Chinese EV growth story. But if results do not meet expectations, shares will likely move in the other direction.
Look Elsewhere for Opportunity
I remain skeptical on the EV maker’s future prospects. Once electric cars are viable, the major auto makers will have the edge. They have the scale and pricing power to edge out these upstarts. While Tesla is on the cusp of profitability, Nio remains a long shot. With the company lacking even its own factory, they will need dilutive capital infusions in order to scale. This reduces potential upside for NIO stock.
There are better growth stories out there. Vehicle manufacturing’s capital-intensive nature makes it hard for upstarts to succeed. Disruptors in industries with fewer barriers to entry face better odds. With this in mind, continue to avoid Nio stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.