Ordinarily, I would tell someone who would buy a stock that increased by more than 1,000% since the start of the year that they should seek â€œprofessional helpâ€ from a therapist. I am prepared, though, to throw caution to the wind when it comes to Chinese electric vehicle maker Nio (NASDAQ:NIO). Yes, for me, Nio stock is one of those rare exceptions.
Like most people, I am a sucker for an underdog story, and few companies defied the odds quite like NIO.Â
What a Comeback !!!
Last year, Nio stock traded at $1.39 as the company faced bankruptcy. It got a financial bailout valued at about $1 billion from â€œstate-owned entitiesâ€ based in Hefei, China, where it makes its vehicles. Chinese behemoths Baidu (NASDAQ:BIDU) and Tencent (OTCMKTS:TCEHY) are among NIOâ€™s investors. The Chinese Communist Party likely approved the deal.
Unlike most of the hundreds of EV startups in China, Nio produces and sells vehicles such as the ES6, which the BBCâ€™s â€œTop Gearâ€ show said in a recent review performed surprisingly well.
â€œThe interior is comfortable, spacious, and feels well-made, the infotainment looks and feels slick and the powertrain is smooth, quiet and makes this 2,345kg car properly quick,â€ the programâ€™s website says.Â
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Sure, money-losing Nioâ€™s valuation is ridiculous, but bulls can ignore that for now.
Nio Stockâ€™s Insane Valuation
With a market capitalization of around $75 billion, NIO is now worth as much as the combined capitalizations of Ford (NYSE:F) ($35 billion) and Fiat Chrysler (NYSE:FCAU) ($36 billion), companies with histories dating more than a century. General Motors (NYSE:GM), founded in 1908, is valued at nearly $60 billion. Only three other automakers â€” Tesla (NASDAQ:TSLA), Toyota Motor (NYSE:TM), and Volkswagen (OTCMKTS:VLKAF), are valued higher than Nio.
Wall Street analysts believe NIO shares have run out of gas. Their average price target on NIO stock is $40.51, roughly 13% below where it currently trades. I am not ready to throw in the towel on NIO stock just yet. NIO is a useful tool for the Chinese Communist Party, under international pressure to crack down on pollutants linked to global warming.
â€œOriginally, the Chinese plan had been to remove NEV subsidies by the end of 2020. However, in March of this year, following the post-Covid-19 economic recession, the decision was made to extend them,â€ according to CleanTechnica. â€œThe revision now includes consumers who buy new electric vehicles through 2022 and also contains provisions for tax exemptions on purchases for 2 years.â€
China aims to have alternative fuel vehicles account for 20% of all automobile sales by 2025, a huge jump from their current level of 5%. The Communist Party would prefer that a local company like Nio plays a prominent part in solving the vexing problem of air pollution instead of a foreigner. Nio is too important for Chinaâ€™s image to allow to fail.
So, in conclusion, I think NIO stock will trade higher and defy the naysayers. Unfortunately, like all bubbles, this one will burst though it may take a year or two for it to happen. Itâ€™s best to wait for a 10 to 20 percent pullback before pulling the trigger. Anyone who buys NIO shares, though, better brace themselves for a bumpy ride.
On the date of publication, Jonathan Berr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. Heâ€™s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.Â