Should You Buy Nio Stock?
17 years ago, on July 1st, 2003 Tesla Motor Company announced its plans to transform the auto industry.
And then on June 29th, 2010 it became the first new care company to IPO and list its shares for sale on US stock markets since Ford in 1956.
Since then the companies gone through ups and downs from several near bankruptcies. To as of this writing being the most valuable car company in the world at a market cap of $257 billion led by its famous serial entrepreneur founder Elon Musk.
He and his team achieved these lofty goals by transforming the entire car industry.
He and his team planned out, developed, and then delivered on the promise of electric vehicles by releasing high performance, safe, technologically advanced, beautiful cars to the public.
Since then Tesla’s become a behemoth in the car industry. And its rise has now led to several new car companies trying to follow Tesla in the electric vehicle (EV) space.
Today I want to tell you about one its smaller EV competitors…
We’ll see if you should buy it in the hopes of it becoming the next billionaire creator stock like Tesla… Or if you should avoid it at all costs.
Introducing Nio (NIO)
Nio was founded in November 2014 and it launched its Nio EP9 Sports car the same day.
Here’s a picture of that beautiful $1.2 million vehicle…
Then in September 2018 the company IPO’d on the market.
It “Operates in China’s premium electric vehicle market. And designs, manufactures, and sells parts for electric vehicles.”
Note the operating in China part of the sentence. As of this writing its only operations are in China.
Nio develops, manufacturers, and sells both cars and SUV’s. With plans to branch out to other areas.
Its following Tesla’s original launch model almost to a T…
Start with cars higher end cars.
Then move to SUV’s.
Then move to commercial vehicles like trucking.
The main difference is that Tesla started with an $80,000 car while NIO started with a $1.2 million car.
Its even following Tesla’s model in terms of building out charging stations in China.
And this is where the largest difference in the two companies comes in.
In a Tesla you charge your cars battery at a charging station when it needs to be “filled up.”
With Nio, you swap out batteries.
So instead of going to a charging station to charge up your battery, with a Nio you go to a battery swap station to change the battery out for one that’s charged up.
Tesla thought about this in 2015 but gave up on the battery charging stations because of the long time it then took to get that operation up and running. And, because it was too expensive.
As context to this, in 2012 Israeli company Better Place proved the battery swapping model could work. But the company later went bankrupt due to the huge equipment and resource costs required.
We’ll talk more about its fundamentals and profitability later. But before that how is Nio doing compared to Tesla today?
Who’s Winning The Sales Battle Between Nio Vs Tesla?
Tesla was founded in 2003 by Martin Eberhard and Marc Tarpenning. And then later serial entrepreneur Elon Musk came on board and was named a co-founder.
And while its been around since 2003, Tesla didn’t start delivering cars at all until 2008. And to the masses in 2012.
In total it sold 987,302 vehicles as of the most recent data available on March 31st, 2020.
This is an average of 123,412 cars sold per year from 2012 to today.
As a comparison Nio sold a total of f 51,372 cars and SUV’s from 2014 to July 2020. Or an average of 8,562 vehicles per year.
The large disparity in total cars sold and yearly average cars sold isn’t a surprise since Tesla’s been around much longer than Nio.
But what about a more apples to apples comparison based on China only sales since 2014?
Unfortunately, I can’t give this direct comparison due to the lack of Tesla spelling out how many cars it sold in China by month and year.
But what I can tell you is that in May 2020 Nio sold 3,436 vehicles total in China. And 10,429 vehicles total from January 1st, 2020 to May 31st, 2020.
Tesla dwarfed them by selling 11,468 cars in just May in the country.
In other words, Tesla sold more vehicles in China in one month than Nio sold in the entire year up to that point at the end of May 2020.
Tesla is crushing Nio in worldwide sales and on its home turf in China. On a total, yearly average, and 2020 monthly China numbers only basis.
And it’s not close.
So, Tesla is dominating Nio now in terms of sales. But what does Nio’s profitability and cash flow look like? Because this is really where the value of companies is created over time.
Is Nio Profitable?
Let’s do a quick rundown of Nio’s profitability and cash flow. Because profits and cash flow drive the long-term value and pricing of a stock over time.
I measure this in part by looking at two important metrics.
Operating profits and free cash flow/sales (FCF/Sales).
On an operating profit basis Nio’s produced an average operating profit margin of negative 167.7% per year on average every year over the last 2 years.
Normally I like to go back a decade and look at these numbers, or at minimum 5 years. But I can’t do either in Nio’s case because of its IPO in 2018.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment.
And Nio’s got negative margins in this case of more than 100%. Meaning its spending 167.7% per year on average more than its earning in operating profits.
This falls well below my threshold of what I look for to consider for investment.
What about FCF/Sales?
Over the last 2 years Nio’s average a negative 173.3% per year.
Again, this is horrific and means the company is spending 173.3% more than what its earning in free cash flow.
How are both numbers so negative? And how is it possible for Nio to do this and stay in business.
Because it keeps issuing shares and debt.
Its using these to stay in business, keep developing and selling its products, and to keep building out its infrastructure.
High growth companies do this to continue growing.
And Tesla are just a few names of businesses in the high-tech arena who followed this same model to becoming the behemoths they are today.
But neither Tesla nor Uber have ever been this unprofitable on those metrics. At least not while they’ve been public companies.
The worst operating profits Uber’s had as a public company is negative 78.6% in 2016. And in that same year it also had its worst year in terms of the FCF/Sales ratio at negative 118.3%.
Tesla’s worst numbers were a decade ago in 2010 as it now achieving profitability.
And as of this writing Airbnb still isn’t public so its impossible to say what their numbers are.
Both operating profit and free cash flow are important because they help show you the profitability of the company.
The more profitable a company is the higher its value goes over time. And the more money it can spend on innovations and serving customers.
Instead, Nio is diluting shareholders and issuing ever more debt just to stay in business.
The amount of unprofitability Nio’s has is enormous and unsustainable.
And it also makes it near impossible to properly value the company.
But one things for certain, with its huge run up this year of 255.4% it’s now worth $15.3 billion as of this writing on July 8th.
Nio is not worth $15.3 billion anywhere else than in the crazy speculative market we’re living in today.
If you buy Nio shares today you’re buying a company that is spending almost 2X what its bringing in, in profits and cash flow.
This is more gambling than investing.
And the people buying Nio shares today are doing just that. Gambling.
I recommend you avoid buying Nio shares today because they are far closer to imploding than profitability.
If you’re looking for some potential stocks to consider buying use the following links to some of our recent articles.
Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.