Nio (NYSE:NIO) inventory has bounced again up to now month. Since July 1, shares have rallied almost 23%, rising from $2.67/share to $three.28. Damaging investor sentiment has pulled again, with speculators reentering NIO inventory.
However with heavy competitors, Nio has its work lower out for them. Can the corporate grow to be a viable competitor to Tesla (NASDAQ:TSLA) and rival China-based EV makers?
Whereas shares have seen a “lifeless cat bounce” little doubt, I proceed to imagine NIO isn’t a purchase. Brief-term, bits of fine information might increase the Nio inventory value. However long-term, there are higher alternatives elsewhere. Right here’s my thesis for why buyers ought to take a look at the info and keep away from Nio inventory.
Monetary Maelstrom Forward
The EV maker announced on July 10 that it delivered three,553 of its ES8 and ES6 automobiles within the second quarter of 2019. This determine exceeded steering of two,800 to three,000 deliveries. This crumb of fine information has pushed up the Nio inventory value, explaining the pop since early July. Nevertheless, shares stay far beneath the IPO value of $6.26 a share, and really far beneath its all-time excessive of $13.80 per share.
Is the second quarter supply information an indication that NIO inventory is on the rise, or are these figures irrelevant?
The Q2 supply numbers appear much less spectacular in comparison with Q1 deliveries of three,989. However with the discharge of the smaller-sized ES6 mannequin in June, Q3 supply progress may very well be big. There have been 12,000 pre-orders alone for the E6. Whereas that mannequin will possible cannibalize gross sales of the E8, the corporate is inching nearer to crucial mass.
To make sure, Nio has a far methods to go earlier than it scales to profitability. As working losses proceed, the corporate could also be getting into a monetary maelstrom. As I discussed in my July 5 article, the agency doesn’t have its personal manufacturing amenities. As a substitute, it builds automobiles at a state-owned JAC Motors manufacturing facility. The corporate is obligated to cowl the manufacturing facility’s losses till April 2021. Depending on fairness infusions, Nio continues to be a work-in-progress.
However isn’t it darkest earlier than the daybreak? May buyers be getting in at a improbable value earlier than these headwinds are resolved?
Capital infusions might assist it survive lengthy sufficient to scale. However with the present valuation, a lot of this potential upside might already be mirrored within the NIO inventory value.
Valuation Stays a Concern
Nio inventory sells at a considerable enterprise value-to-sales premium to its larger rival Tesla. NIO shares commerce at an EV/Gross sales ratio of four.four, in comparison with 2.1 for TSLA. Nio’s working efficiency doesn’t clarify this discrepancy. Not like TSLA, NIO exhibits detrimental gross margins. Its financing points make Tesla seem like a blue chip. It might be unfair to match the 2 firms. Tesla is far additional down the trail to profitability. However with Tesla’s Chinese language “gigafactory” approaching line throughout the subsequent 12 months, it appears silly to assume that upstart Nio has a shot.
Maybe protectionist commerce insurance policies might give the corporate an edge on its residence turf. With the U.S.-China commerce wars flaring back up, as an American firm Tesla might face challenges. However NIO isn’t the one Chinese language electrical automobile maker. Giant firms equivalent to BYD (OTCMKTS:BYDDF) are already within the area. As InvestorPlace contributor James Brumley talked about in a recent article, even Alibaba (NYSE:BABA) has thrown its hat within the ring, backing EV startup Xpeng.
As talked about in my final article on the shares, the Nio inventory value will get a lift from being the one Chinese language EV maker buying and selling on a significant trade. Opponents like BYD commerce over-the-counter. Traders might bid up NIO inventory to achieve publicity to the Chinese language EV progress story. But when outcomes don’t meet expectations, shares will possible transfer within the different route.
Look Elsewhere for Alternative
I stay skeptical on the EV maker’s future prospects. As soon as electrical automobiles are viable, the key auto makers could have the sting. They’ve the size and pricing energy to edge out these upstarts. Whereas Tesla is on the cusp of profitability, Nio stays an extended shot. With the corporate missing even its personal manufacturing facility, they are going to want dilutive capital infusions with the intention to scale. This reduces potential upside for NIO inventory.
There are higher progress tales on the market. Car manufacturing’s capital-intensive nature makes it exhausting for upstarts to succeed. Disruptors in industries with fewer limitations to entry face higher odds. With this in thoughts, proceed to keep away from Nio inventory.
As of this writing, Thomas Niel didn’t maintain a place in any of the aforementioned securities.