To hear the skeptics, Nio (NYSE:NIO) is headed for extinction. With NIO stock retreating in recent sessions as coronavirus fears swirl, those skeptics are speaking up once again.
And there are risks here. Nio still has to raise capital to improve its balance sheet. The spread of the coronavirus is going to have a significant short-term impact on the Chinese economy, and thus Nio’s sales for the first quarter.
But there are real rewards here, too. Most importantly, Nio has exposure to several key trends that will last for decades, not for years.
Investors should focus on those long-term trends, rather than listen to naysayers focusing on short-term fears.
The Tesla of China
It’s too simplistic to call NIO the “Tesla (NASDAQ:TSLA) of China,” as some observers do. But there’s truth to the comparison.
After all, both companies develop not only high-quality electric vehicles, but simply high-quality vehicles. Tesla’s Model S is light-years ahead of what cars were just a decade ago, with acceleration from 0 to 60 miles per hour in just 2.5 seconds.
Nio’s cars don’t have quite the same acceleration — the base model of its ES6 goes 0 to 60 in a more pedestrian 5.6 seconds — but they’re luxury vehicles just the same. As one reviewer noted, the ES6 even comes with a “Tesla-esque tablet-sized touchscreen.”
Even Nio’s locations are luxurious. The company’s Nio Houses are more than just dealerships. They’re “swanky clubhouses,” as Business Insider termed them, that also work to cement Nio’s status with high-income Chinese consumers.
As we’ve seen with Tesla, branding matters. Quality matters. That electric vehicle leader now has a market capitalization greater than that of Ford (NYSE:F) and General Motors (NYSE:GM) combined. Tesla also faced more than its share of skepticism, particularly in its going. Tesla stock now has risen more than 3,700% since going public and has gained 268% from its 52-week low.
The Trends Benefiting NIO Stock
What makes NIO stock intriguing — and admittedly risky — is that the company is much earlier in its growth curve than Tesla is now. As of the end of 2019, the company had delivered just 31,913 vehicles in its history.
But sales are rising quickly, as the smaller ES8 complements the company’s first model, the ES6. December deliveries rose 25% month-over-month. And Wall Street projects that full-year revenue should nearly triple just between 2019 and 2021.
There’s little reason why that growth will come to an end any time soon. China alone represents a vast market, with a population roughly quadruple that of the U.S. The country’s central government is aggressively backing electric vehicle development through subsidies, in a bid to curb the rampant pollution in its major cities. At the same time, millions of Chinese move into the middle class every year as that country’s economy expands.
Nio thus sits at an intersection of significant trends that will last for decades, not for years. The Chinese upper class will continue to grow. Demand for electric vehicles will rise. Nio even has a partnership with Intel (NASDAQ:INTC) unit Mobileye to develop self-driving cars, making it an autonomous vehicle play in the future.
The opportunity here is simply enormous. The valuation is not: Nio’s market capitalization of a little over $4 billion is roughly 4% that of Tesla.
The Worries — and the Answers
To hear the naysayers, however, Nio stock should be written off. The company is losing money, after all. Its balance sheet is stretched, with less than 2 billion RMB ($274 million) in cash as of the end of the third quarter. And the coronavirus now will cost the company sales it can ill afford to lose.
But these risks are manageable. As Nio itself told investors last month, the company remains in discussions with state-owned GAC Group about “financing and strategic opportunities.” And with Tesla itself now making vehicles in China, it seems highly unlikely that Beijing would allow those discussions to end without creating a domestic rival to that U.S. manufacturer.
Much the same is likely true for coronavirus fears. Chinese authorities already are supporting their financial markets. They will do the same with domestic manufacturers until the virus is contained.
As for operating losses, developing a car manufacturing giant takes time and capital, as Tesla itself has proven. All the while, TSLA bears have argued that company was headed for bankruptcy. Tesla was able to raise the funds needed to get through to profitability. I’d expect Nio will do the same.
There’s simply too much riding on Nio for the Chinese central government to let it fail. And if Nio can make it through to profitability, the long-term opportunity is enormous. That’s where smart investors should focus: on the opportunity. And if short-term noise makes NIO stock cheaper, that just makes the opportunity more attractive.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.