Nio (NYSE:NIO) stock enchanted U.S. buyers this 12 months. As buyers have scrambled to search out “the next Tesla (NASDAQ:TSLA),” shares in Nio have skyrocketed 415%. However there’s one drawback:
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Nio isn’t Tesla.
As an alternative, Nio (generally known as Wèilái in China) faces far stiffer competitors than Tesla ever did. With a minimum of 14 different electrical car producers in China, it should take way over wishful pondering for Nio shareholders to win.
Nio Stock: Combating for Chinese language Market Share
Don’t get me incorrect. I really like the electrical car house.
It’s a enterprise rising at 25% per 12 months the place winners will generate 1,000%-type returns for sensible buyers. And the Chinese language automotive business at the moment appears very similar to America’s booming one of many 1950s when the variety of U.S. registered vehicles doubled.
Nonetheless, the booming U.S. auto business additionally noticed many losers. Between 1946 and 1960, the U.S. noticed a minimum of 27 main auto firms fold. The record consists of well-known names like AMC, to stranger ones just like the Aurora, named by some auto historians as “the ugliest car ever.”
At this time, Nio faces an identical panorama.
Carsalesbase, an business tracker, counts no fewer than 91 Chinese language automotive manufacturers with greater than 1,000 gross sales in 2019. Because the No. 62 model in China (that’s not a misprint), Nio is sandwiched by No. 61 Qorus and No. 63 Oushan Cos, manufacturers barely recognized exterior China.
Can Nio win? Very probably. Automobile reviewers have given the corporate’s new ES6 SUV first rate critiques. Nio additionally managed to develop gross sales by 12,000 models in 2019, representing a 158% improve.
However will Nio win? That relies on altering Chinese language buyer tastes, one thing far tougher to foretell.
The Chinese language Auto Market: Prepared for a Shakeout
Historical past hasn’t been sort to auto producers. Bear in mind the golden period of U.S. auto manufacturing within the 1950s? By 2019, the variety of U.S. manufacturers had fallen to simply eight. Together with international ones, American customers now purchase solely 34 completely different automotive manufacturers.
Returns within the business are additionally meager. No main automotive producer has earned its price of capital over the previous decade.
Chinese language auto producers are going through the identical destiny. In 2019, 42 automotive manufacturers noticed gross sales declines of 20% or extra in China. Even main gamers like Leopaard Motors and Huansu noticed gross sales plummet 60% as prospects shifted consideration to different firms. (At its peak, Huansu bought virtually 270,000 vehicles yearly). That lengthy record of 91 Chinese language automotive manufacturers will definitely dwindle over the subsequent a number of years.
In different phrases, Chinese language automotive consumers have a variety of decisions and never all automotive manufacturers will survive.
That’s the explanation why, even in an amazing business, I’ll solely choose the businesses with the very best probabilities of success.
What About Nio?
Nio stock followers like to think about Wèilái as “the next Tesla.”
Need proof? Let’s examine Nio in 2019 to Tesla in 2014. That’s the 12 months TSLA bought 22,000 electrical autos, roughly the identical quantity that Nio did in 2019. However that’s the place the similarities finish.
Tesla noticed colossal demand: Analysts on the time estimated the corporate had a nine-month backlog. Demand was so excessive that web sites popped up so Tesla consumers might ask one another the place they have been in line. Nio, nonetheless, struggled to fill its order books through the coronavirus pandemic, one thing Tesla hasn’t had bother with.
Gross margin: TSLA generated a 27% gross margin in 2014. Nio, alternatively, recorded a -15% gross margin in 2019. The determine improved to three% within the first half of 2020, however which means Nio can nonetheless barely get prospects to pay what their SUVs price to supply.
Competitors: Nio counts a minimum of 14 rivals within the electrical SUV house, together with SAIC, Audi, Mercedes Benz (OTCMKTS:DMLRY) and Li Auto (NASDAQ:LI). Nio additionally contends with BYD (OTCMKTS:BYDDF), the 800-pound gorilla of the Chinese language EV world. Based in 2003, the Warren Buffett-backed firm has develop into the No. 15 largest automotive model in China. In April alone, BYD bought 12,262 plug-in EVs.
Taken collectively, this means “Wèilái” fails to seize the Chinese language client the identical means that Tesla did in 2014.
Does Nio Have a Secret Sauce?
Nio doesn’t produce its personal vehicles. As an alternative, the automotive firm contracts with state-owned Jianghuai Car Group (JAC) for manufacturing. Phrases, nonetheless, are significantly onerous. Not solely should Nio pay per car produced, however in addition they should compensate JAC for any working losses that JAC itself generates.
Die-hard followers of Nio stock would twist this detrimental right into a constructive, calling the corporate a “lifestyle brand.” To them, it’s a profit that the corporate doesn’t personal its manufacturing amenities – why trouble if you happen to’re a pure-bred model? Certainly, Nio additionally sells clothes, merchandise, and even “Nio Houses.”
And success as a life-style model will surely carry riches to buyers. LVMH (OTCMKTS:LVMUY), the corporate that owns Louis Vuitton, Hennessey, and different high-end manufacturers, is worth $241 billion. Nio reaching that valuation means a 10x acquire for buyers.
However buyers ought to keep in mind that these are tall mountains to climb.
Firstly, success in a crowded auto business is already difficult; Tesla managed via Elon Musk’s herculean effort in fundraising and making a distinctly fascinating automotive. Nio, alternatively, has had bother wowing customers. Underwhelmed customers declare Nio’s ES8 SUV travels simply 186 miles on a single cost (vs. Tesla’s Model X’s vary of 320-350 miles)
Secondly, success as a life-style model will show much more taxing. Tons of of previously shining manufacturers, from Umbro and Ecko Limitless, are actually housed in penny stocks.
Can Nio Succeed?
Definitely. Think about a world the place $52,000 “Wèilái” SUVs trundle down U.S. streets. One the place American and European customers eschew Teslas, BMWs, and Audis in favor of a greater, sooner, cheaper, extra fascinating Chinese language import.
Are you able to think about that?
As a result of that’s what it could take for Nio to develop into the subsequent Tesla: worldwide recognition. (Tesla Model three is the second-most common EV in China). The corporate is already worth as a lot as Ford Motor (NYSE:F), so it wants international development to push its stock up one other 10x.
However suppose you’ve bother imagining Nio shifting 500,000 “Wèilái” models worldwide yearly. In that case, you’re higher off discovering one other EV firm like Workhorse (NASDAQ:WKHS), Nikola (NASDAQ:NKLA), or Li Auto which may.
The Backside Line
Whether or not Nio stock rises or falls 10% at the moment or tomorrow is a technician’s recreation (and one which I understand how to play). However if you happen to’re in search of 10x-100x returns within the Chinese language electrical car market, then pause a second.
The following Tesla gained’t simply dominate the Chinese language EV market. It must dominate the world.
On the date of publication, Tom Yeung didn’t have (both instantly or not directly) any positions within the securities talked about on this article.
Tom Yeung, CFA, is a registered funding advisor on a mission to carry simplicity to the world of investing.