Tesla (TSLA) vs. NIO (NIO)

Is NIO (NIO) the Next Tesla (TSLA)?

Everyone knows Tesla.

But almost nobody knows NIO—and today I want to change that, by comparing both companies and speculating where NIO (both the company and the stock) might end up years from now.

Tesla has transformed itself from a niche automotive manufacturer to a major player in the industry and the leader of the global electric car movement. The company not only delivered a total of 245,240 electric vehicles in 2018, it ended the year manufacturing at a rate of more than 350,000 vehicles per year.

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NIO is a Chinese company that just last June began selling the ES8, a seven-seat SUV that looks like this:

Blue Nio

NIO delivered 11,348 of these vehicles to Chinese customers in 2018, capping the year by delivering 3,318 vehicles in December. Production-wise, that puts NIO roughly where Tesla was in 2013, but NIO is accelerating faster, in part because the “road” has already been paved (by Tesla) and in part because NIO is not building the cars itself; it’s contracting the manufacturing to an experienced automotive company. (It’s sort of the same way Apple contracts for iPhones to be built.)

So, there are two questions on my mind today.

One is whether NIO poses a significant threat to Tesla’s business in China (and eventually in the U.S.), and the other is whether NIO might be as good an investment today as Tesla was back in 2013. (TSLA stock is up about 785% since the start of 2013.)

Is NIO a Tesla-killer?

The label Tesla-killer gets tossed around a lot, often when a journalist wants an attention-getting headline. But so far, no Tesla-killer has arrived.

  • The label “Tesla-killer” has been used for Faraday Future, which has burned through a lot of money but has not yet built a car you can buy.
  • It’s been used for Lucid, with much the same result, though you can reserve a luxury sedan on the company’s web site—if you want to take a risk—for $2,500.
  • It’s been used for Evelozcity (the newest of the three companies addressing the electric luxury sedan market), which has a lot of job openings advertised on its web site—but no cars.
  • And it’s been used for Rivian—which is now taking $1,000 deposits for reservations of its SUV and pickup truck.

But so far, no company has been able to slow Tesla’s rapid expansion and no company has come close to producing electric cars that are as competitive, based on performance, price and appearance.

As for the traditional makers of luxury performance vehicles, Audi, Volkswagen, Mercedes and BMW, they’re years behind, and hampered by the legacy of their internal combustion operations.

And Toyota, which virtually owned the hybrid market with its Prius, took a wrong turn by betting on hydrogen instead of batteries and now finds itself woefully behind.

But I believe NIO has a fighting chance.

What NIO Has in Its Favor

Four things I like to see in a great growth stock are:

  • Excellent visionary management
  • Healthy finances
  • Fast growth of revenues
  • Plenty of room for public perception to improve

1. NIO has the management. NIO’s founder and largest shareholder is William Li, the founder of BitAuto Holdings (BITA), an internet marketing, content and transaction company for the Chinese auto market. The second-largest stake is held by Chinese internet giant Tencent and the third-largest investor is the well-respected investment management firm Baille Gifford. (Interestingly, both firms have a stake in Tesla.)

2. NIO has the finances. Its IPO on the NYSE in September raised $1 billion.

3. NIO is growing revenues fast, as illustrated by its 2018 sales figures. It promises to be very competitive in China vs. Tesla. And contract manufacturing means NIO can ramp up fast.

4. And NIO is not well-loved by investors. In fact, most U.S. investors have never heard of the company.

Additionally, NIO has the implicit blessing of the Chinese government, which is working hard to reduce air pollution in the country by encouraging the development of electric vehicles.

What NIO Lacks

Still, NIO doesn’t have the cachet of Tesla, which is clearly the planet’s preeminent electric car manufacturer today.

It doesn’t have anything to rival the Model S, which is a true luxury car.

It doesn’t have anything to rival the Model 3 sedan, which Tesla is now selling in the U.S., Europe and China, and will begin manufacturing in China near the end of this year.

And it doesn’t have Tesla’s Supercharger network, which now consists of 12,888 Superchargers in 1,441 Supercharger stations in 34 countries.

These Supercharger stations now blanket the entire U.S, with the exception of Alaska, Hawaii and North Dakota, though the route across North Dakota should be covered this year, and Hawaii has installations planned as well.

And 249 of these Supercharger stations are in China, with more being added all the time—but they won’t be available for NIO drivers.

What NIO does offer the owners of its cars is a battery swap service (an idea Tesla tinkered with and rejected). NIO is already operating 18 swap locations on major highway routes, each equipped with at least five spare battery packs; the company says that it can swap in a fully charged pack in an ES8 in about three minutes.

NIO Battery Swapping Station

NIO’s goal is to deploy 1,100 battery-swapping stations by 2020, which would be impressive. But I wonder what happens if you’re the sixth car in line.

Additionally, NIO offers a mobile charging service, whereby a van loaded with batteries can be summoned via the NIO app to come provide a charge. But the service is only available within 200 km of the owner’s home city and is limited to two uses a month and 12 times annually—so not conducive to long road trips.

(Full disclosure and digression: I’m not an unbiased observer. I’ve been driving a Tesla Model S since September 2013, in the process racking up more than 60,000 miles. My daily commute is just one mile, but I like to take road trips, and in the process, I’ve visited 61 different superchargers. In my opinion, if you really want to travel freely in an electric car, there’s nothing better than Superchargers. Also, watching the Supercharger network grow by tracking the changes on this map provides an interesting look at the expanding segment of the world’s population that can afford/access Tesla vehicles; recent additions include United Arab Emirates, Jordan, Croatia, Hungary, Slovakia and Poland—and I see no reason why these Superchargers won’t eventually blanket the globe.)

The Real Contest

The real contest, perhaps, will come when consumers in China can compare the upcoming small SUVs of both Tesla and NIO and vote with their dollars (or yuan).

NIO’s offering, the ES6, will be a five-seat SUV with deliveries slated to start in June 2019. The base model will have a range of up to 255 miles while the high-end model may go up to 317 miles on a single charge.

Tesla’s offering will be the Model Y, a (presumably) five-seat crossover vehicle that will share around 75 percent of its components with the Model 3 sedan, thus simplifying the model’s development and increasing economies of scale. U.S. manufacturing and deliveries may begin in mid 2020, while manufacturing in Tesla’s China factory may begin in 2021.

Is NIO a Good Investment today?

One key attribute of successful investors is that they avoid what’s popular. Value investors buy stocks that used to be popular but are now cheap, while growth investors buy stocks before they get very popular.

One of my best recommendations was TSLA way back in 2011, when skepticism about the company was very high; that investment is up 940% since then.

But TSLA is now a very popular stock, with a market capitalization of $52 billion, and two consecutive quarters of positive earnings, and the stock is owned by more than a thousand mutual funds. So while the company is more established, the stock doesn’t have the growth potential it used to, simply because all the big investors already own it.

NIO, on the other hand, has a market capitalization of $7.9 billion, has several quarters of losses ahead and had only 46 mutual funds on board at the end of the third quarter—in part because it had only come public in the U.S. in September. Not only is it not popular, most U.S. investors don’t even know it exists, even though it trades on the NYSE.

But there’s no denying that the company is off to a fast start, fundamentally. And the chart is auspicious, as well. NIO came public at 6 on September 12 and peaked above 12 the next day, but over the next three weeks drifted right back down to where it started. And over the past four months, the stock has traced out a nice bottom, ranging between 6 and 8, with a faint upward bias.

NIO Stock Chart

Interestingly, this chart reminds me of TSLA when I recommended it back in 2011. That, of course, means almost nothing, but the chart does tell me that risk is rather low at this point (if you can call any low-priced stock low-risk) and upside potential relatively high.

The one guarantee is that there will be volatility, but if my analysis is correct, it will be in an upward direction.

For more coverage of both TSLA and NIO, become a regular reader of Cabot Stock of the Week.

Timothy Lutts

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