About a year ago, Chinese premium electric vehicle maker NIO (NYSE:NIO) raised $1 billion in a NYSE listing. It’s been a painful ride for NIO stock ever since. NIO peaked at $14 two days after its IPO. Today, the stock trades hands narrowly above $3.
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In other words, over the course of about a year, the stock has shed roughly 80% of its value.
Why the big sell-off? Two big reasons. First, weak external fundamentals, with global growth slowing and China’s auto market in retreat. Second, similarly weak internal fundamentals, NIO’s delivery volume pace slowed in 2019. That’s not supposed to happen for a supposed “hyper-growth” EV company.
The unfortunate reality is that NIO will remain depressed for the foreseeable future for those same two reasons. The big picture here is that there are simply way too many electric vehicle (EV) manufacturers in China, and the industry is due for rapid and dramatic consolidation over the next several years.
NIO isn’t giving investors any reason to believe that they will survive that consolidation. Until they do, NIO stock won’t bounce back.
To be sure, there is a potential runway here wherein NIO turns into a multi-bagger. But, until the company shows that it will survive the forthcoming massive EV industry consolidation, that runway lacks visibility and tangibility. In the absence of a tangible upside, NIO stock will remain weak.
NIO May Not Survive EV Industry Consolidation
When it comes to NIO stock, there’s one number that’s more important anything else – 486. That’s the number of electric vehicle companies in China.
There are no more than 20 to 30 electric vehicle companies are actively selling cars into the U.S. EV market. Thus, China’s EV market is way overpopulated.
This isn’t surprising. China’s EV market has boomed over the past several years. Booming industries attract lots of new entrants since everyone and their best friend wants a piece of the expanding pie, but, China’s EV market cannot sustain nearly 500 players.
As such, over the next several years as China’s EV market matures and rationalizes, it will also simultaneously consolidate around a few larger players – probably around 20 to 30 major players. Thus, if you randomly picked a Chinese EV company today, there’s about a 95% chance you pick a company that won’t be around in five years and only a 5% chance you pick a company that will be a big long term winner.
Right now, NIO is struggling to prove to investors that it will be a part of that 5%. Delivery volumes peaked in the fourth quarter of 2018 at nearly 8,000. Total deliveries dropped in the first quarter of 2019 to under 4,000. They dropped again in the second of 2019 to just above 3,500.
Extrapolating from July delivery data, NIO is on track to deliver about 2,500 vehicles in the third quarter, and that’s with a new vehicle launch in June.
In other words, NIO’s delivery volume trajectory is disheartening. It’s not going up. It’s going down. And, it’s going down despite the company launching a new vehicle. Thus, the current trend implies that NIO will be part of the 95% of EV companies that goes extinct.
So long as the current trend implies this, NIO stock will remain depressed.
NIO Could Stage a Big Turnaround
Personally, I have a hunch that NIO will survive this consolidation.
NIO has a niche. They sell premium EVs. That niche eliminates a bunch of competition. It also gives the company a loyal customer base, which the company is fully tapping into by creating an ecosystem of luxury surrounding its vehicle owners, with things such as swanky clubhouses.
In other words, NIO isn’t creating a car company. They are establishing a niche community of high-end EV owners and that seems sustainable.
As such, I do think that NIO will survive this consolidation period. If it does, the stock will turn into a multi-bagger in the long run.
But, the current data does not support this thesis, because the delivery volume trajectory is negative. Until that delivery volume trajectory turns positive, the data won’t support a rebound.
Bottom Line on NIO Stock
NIO remains too risky to touch at current levels. The delivery volume trajectory is negative, and only deteriorating the deeper we head into 2019. Until that trajectory reverses course, I’d stay from NIO stock.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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