Ignore the Doom-Mongering Surrounding Nio

Easily one of the most contentious contrarian opportunities in the markets is Chinese electric vehicle maker Nio (NYSE:NIO). Though the company’s narrative has been driven by speculation that it could eventually unseat established leaders like Tesla (NASDAQ:TSLA), Nio stock over the long term has been disappointing. Over the last two years, NIO has declined due to pressures in China’s automotive market and the U.S.-China trade war. Now, the impact of the novel coronavirus threatens trading sentiment.

NIO Stock

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At first glance, the bearish argument against Nio stock seems the most reasonable. While it’s true that China was the first nation to suffer from the Covid-19 pandemic, and therefore, the first to recover from it, that hasn’t meant its economy is back to 100%. As the New York Times points out, manufacturing has returned. However, it also needs its consumers to return.

It’s a simple equation: no demand equates to no growth, no matter how much supply is available.

However, I think it’s unreasonable to assume that everything would magically return to normal. Obviously, the rapid turmoil has created one of the worst global crises in modern history. But ignoring Nio stock based on these temporary concerns is a bad mistake.

Primarily, China emphasizes longer-term holistic thinking. Therefore, it wasn’t surprising – as I’ll explain later – that NIO received a cash injection worth $989 million. Specifically, the investment came from state-owned enterprises from eastern China. Later, Nio CEO William Li stated that its financial pressures were in the rear-view mirror.

While it make take some time for Nio stock to work through the technical headwinds that remain, fundamentally, this is one of the most compelling stories for the rest of 2020.

Nio Stock to Ride China’s Automotive Ambitions

Over a period of decades, China has established itself as the world’s manufacturing powerhouse. If you want to compete, you’ve got to outsource your manufacturing to China. Only there do you get the ideal balance between quality, cost and scale.

It’s no coincidence that Tesla has opened a factory in Shanghai. Despite the political implications, cost realities force more companies to shift their production overseas. Time and again, China offers the best balance among core manufacturing attributes.

But one area has frustrated the Chinese: automotive manufacturing. Much of that involves the complexity involved in building fossil-fueled cars. According to Nio executive Izzy Zhu, “The infrastructure from an engineering perspective is lighter and simpler than in a combustion engine.” A typical car will have tens of thousands of parts. But with an EV, “you just put a big battery between the two axles, and motors on both of the axles or one of the axles.”

If you want to know the secret behind Tesla’s success, it comes down to the disruption of simplicity. Sure, modern combustion-powered vehicles are incredibly efficient compared to older counterparts. But they require evermore complex engineering for diminishing returns. With EVs, to Zhu’s point, you basically slap on an electric battery to moving wheels. Furthermore, with advanced scale, EV makers will reach a point where combustion automakers can’t catch up.

And that’s really the long-term thesis that drives Nio stock. Right now, the volatility represents growing pains. As the scale improves, NIO will grow into its potential.

More importantly, the investments that companies like Tesla are pouring into China’s burgeoning EV market afford it an acumen that, years later, will be difficult to usurp. Just like Ford (NYSE:F) revolutionized mass-scale production for the automobile, China will do the same for EVs.

Long-Term Implications

If you’ve followed my work over the years, you know that I emphasize megatrends. In the automotive sector, innovation is clearly shifting from the west to the east.

Unlike the U.S., for example, the Chinese government has invested billions into their EV infrastructure. While it may look silly now, it probably won’t decades down the line. As I mentioned, China thinks several moves ahead.

At a certain point, the U.S. and other nations will realize their folly. By the time they do, it will be too late. China will have asserted authority in EV innovation. And while the platform’s simplicity facilitates a lower barrier to competition, China will still maintain its manufacturing efficiencies.

Therefore, it’s not unreasonable that they can flood the global market with cheap and compelling EVs. Frankly, there’s not much the U.S. nor anyone can do about it.

Currently, few people recognize this brewing megatrend; hence, the volatility in Nio stock. The key for investors today is to get in before the herd does.

Article printed from InvestorPlace Media, https://investorplace.com/moneywire/2020/05/ignore-the-doom-mongering-surrounding-nio-stock/.

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