The Next Tesla

NIO may have solved its cash flow issues, but does this incredibly volatile stock have the potential to become the next Tesla?

In case you haven’t noticed, electric vehicles are all the rage right now. The biggest name in the game is obviously Tesla (NASDAQ: TSLA), which has seen its stock soar more than 110% since the start of the year before the recent market-wide sell-off. 

Believe it or not, though, Tesla does have competitors, despite recently becoming the second-largest carmaker in the world. In the U.S., Tesla’s biggest competitors are the likes of Ford (NYSE: F) and General Motors (NYSE: GM), but in China, it’s NIO (NYSE: NIO). Often lauded as ‘China’s Tesla’, NIO has soared in recent months, but all is not as it might seem. 

What is going on with NIO’s stock?

NIO’s stock price was on a rollercoaster since the start of the new year, slipstreaming on Tesla’s success. In just 4 months between October 1 and January 30, it was up more than 300%. There were many reasons for this, including NIO beating expectations at its latest earnings call

However, there has been a lot of volatility too. This presents a high risk for investors, who are often lured by the hope of large and quick profits. Just look at these more specific stats from January, for example: 

  • January 7, one week into 2020, the stock had fallen 13% from the start of the year
  • January 14, two weeks into 2020, the stock increased 16% from the previous week
  • January 21, three weeks into 2020, the stock was up 38% from the previous week
  • January 23, the stock fell 7% at the end of trading. 
  • January 27, NIO starts the week opening at -14%. 
  • January 30, NIO is up 6% from the start of the week. 

That’s a sign of a very volatile stock, even before the sell-off we’ve seen in the past few weeks. Although if it’s looking to become the next Tesla, volatility is expected.

The other problem…

The problems don’t end with volatility though.  

Nio’s biggest problem is that it is nowhere close to profitability. As of September 30, the company reported that it had just $274.3 million in cash remaining, down from $1.12 billion at the end of March. In January, a report was leaked that the company was close to getting a $1 billion investment, but it turned out to be premature and exaggerated. The stock surged 16% upon the news.

We recently reported on how the company did not have enough money to last a year, with its Q4 report stating that “the Company’s cash balance is not adequate to provide the required working capital and liquidity for continuous operation in the next 12 months.” This same report sent the stock soaring 50% the same day. 

Investing is confusing sometimes. 

Can NIO become the next Tesla?

Given the worldwide slowdown in production and manufacturing thanks to the spread of the coronavirus, a lot of companies now find themselves in a very precarious position. Because Nio is based in China and sells to a Chinese market, it is extremely vulnerable.

However, the company did secure a vitally-important funding loan with the government of the eastern Chinese city of Hefei back in February that is reported to be worth more than $1.4 billion.

As well as this, the company has begun branching out, recently announcing a partnership to develop autonomous cars with technology giant Intel (NASDAQ: INTC). This lucrative market is expected to be worth $41 billion by 2024 and represents a wonderful opportunity for NIO. 

The battle for supremacy in China — the world’s largest EV market — will be a tough one, with Tesla’s Shanghai Gigafactory churning out 1,000 vehicles a week. However, Tesla isn’t a Chinese company, which gives NIO a distinct advantage as the long-time darling of China’s fledgling EV market. The race is in very early stages now, and NIO will be one to watch as 2020 gets underway. 

Nio is due to report its fourth-quarter and full-year 2019 results on Wednesday, March 18.

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Tesla. Read our full disclosure policy here.