Nio Stock Is a Definite Buy; Thank Irrationality for the Discount

Nio (NYSE:NIO) stock recently lost roughly 20% of its value over just a few days. So, should investors avoid it, or sell it if they already own it? No. 

Source: Andy Feng / Shutterstock.com

In fact, I believe it’s likely a great time to invest in the EV maker. Many market participants are looking at Nio’s meteoric rise this year and kicking themselves for not buying it earlier. After all, Nio shares are up 1,057% year-to-date, and that’s even after the recent plunge. Mavericks who invested $10,000 in the company on Jan. 2 would have over $105,000 today. 

So, no one can blame investors for thinking that the train has already left the station and there’s no chance for getting on board with Nio’s growth. But I’d say that thinking is wrong. 

And Nio didn’t drop through faults of its own. No, Nio simply got lumped in with a bad actor and suffered for it. Guilt by association basically. 

NIO Stock Fueled by Strong Q3 Report

Frankly, Nio stock is continuing its upward tear this year based on its third-quarter earnings report. In my mind there’s little rational reason for it to have suffered a 20% drop recently. The company sold $628.4 million worth of vehicles in Q3, and delivered 12,206 vehicles. Those figures represent respective increases of 146.1% and 154.3% year-over-year. 

So, sales and deliveries were excellent. 

But the company still recorded a net loss of $154.2 million. But this was actually an improvement of 58.5% YoY. And the company also managed to continue to improve vehicle margins. Vehicle margin is now 14.5% after being negative just a year earlier. 

If the company continues to set sales and delivery records while improving margins, it won’t be long until it reaches profitability. Then shares will really skyrocket. 

Three Characteristics Underpin Shares

Nio represents three things which are very important: a premium SUV, the Chinese market and electric vehicles. If executives were to brainstorm by drawing a venn diagram with three factors for a business with massive potential it might very well include those three. And in the center you’d find Nio. 

It is no secret that SUVs are king right now. SUVs accounted for 47.4% of auto sales in the U.S. in 2019. Sedans accounted for 22.1% in the same period and this is just four years after SUVs overtook sedans by sales volume. SUVs cost more to produce and thus come with higher sticker prices which is compounded by their demand premium. The result is vehicles that have high sales prices. 

Shrewd readers will note that those statistics relate to the U.S. market and not the Chinese market where Nio sells. Thankfully for Nio, the same trend is occurring in China, and in 2019 SUVs accounted for nearly 44% of all passenger vehicle sales in the country. Further, pundits believe Nio almost certainly has plans to enter the American and European markets in the near future.

Further, Nio is one of the first movers in the Chinese market. The scale of the economy and pace of development makes it a market many manufacturers will seek to understand at any cost. Nio is a Chinese company so we must presume they have a deep understanding of the Chinese consumer. 

Lastly, EVs have been red hot in 2020. Market capitalizations of EV companies are high, to the point that many argue there is a correction looming. I really don’t believe that. Yes, these companies’ share prices are outpacing larger traditional car makers who sell many more vehicles.

But it’s almost getting to the point that it has become an apples to oranges comparison: Although internal combustion engine (ICE) vehicles and EVs are both indeed vehicles, from the standpoint of their stock, the electric ones represent the tech sector and progress. ICE vehicles don’t.

I have little reason to believe that the trend will reverse or slow with any degree of significance. Net net, Nio is in an optimal position moving forward. 

Knocks on Nio

Nio lost roughly one-fifth of its market cap on short-seller news regarding Kandi Technology (NASDAQ:KNDI), another Chinese EV maker. The accusation was that Kandi’s sales figures are not reflective of actual events, and more a reflection of movement related to businesses affiliated with Kandi. This is eerily reminiscent, nearly to the letter, of what happened with Luckin Coffee (OTCMKTS:LKNCY). 

Nio was lumped in with Kandi Technology by association, and as a result, its share price dropped. There are no such similar accusations being leveled against Nio. So the market reaction is simply irrational. But the silver lining is that investors can now buy shares at discount. 

Takeaway

Nio is a rapidly evolving company that has done what young companies must do in increasing sales quarter-on-quarter. Yes, the company lacks efficiency. However, margins are rapidly improving to the effect that it may soon become profitable. The company has a product that looks ideal for markets for the next decade plus. Show me that Nio operates through a series of shell companies, and then I’ll tell you to run from its stock. But this manufacturer is delivering vehicles which is extremely tangible. No one is faking that. 

Investors who kicked themselves in 2020 for missing Nio earlier in the year may be doing the same in five years for not acting now. This company is going up.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”