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Is the NIO share price surge sustainable?

NIO Inc (NYSE:NIO)

NIO Inc is a Tesla Inc (NASDAQ: TSLA) competitor and Chinese electric vehicle (EV) start-up. It launched on the New York Stock Exchange in November 2018 with an underwhelming initial public offering (IPO). Fast forward to today and its share price has risen an outstanding 567%.

Buying NIO shares at IPO was speculative and risky. While the company was rumoured to have anticipated a $20 billion flotation, they raised $1 billion. At the time Tesla was struggling to meet production targets, and Elon Musk wanted to take his company private. This cast a cloud over the EV industry, and only those particularly bullish on the future of tech (or psychic) were brave enough to invest in the sector. For those who did, their insight has paid off handsomely, but is NIO still a good stock to buy today or has it run its course?

Image taken from Yahoo Finance website

A Chinese stock

Investing in foreign markets will always carry slightly more risk than investing in domestic markets. That’s because it’s harder to evaluate what’s really going on. Some analysts are extremely bullish on Asian stocks, particularly as China appears to have emerged from the Coronavirus pandemic relatively unscathed. Also, as it’s self-reliant, compared with other countries, it has more room to grow and profit from that growth. Nevertheless, it’s still important to proceed with caution.

While Alibaba Group Holding Ltd (HKG: 9988) and Tencent Holdings Ltd (HK:0700) have enjoyed a phenomenal stock price acceleration in recent years, the unexpected cancellation of the Ant Group IPO flashes a warning beacon that businesses shouldn’t get ahead of themselves. The government ultimately controls the country, and that includes the business arena.

Record Deliveries

NIO delivered 5055 cars in October, breaking its previous records and making it the only Chinese car brand to do so. This was more than double its deliveries for October 2019. The NIO share price surged 14% on the news.

NIO sells its range of luxury electric vehicles to Chinese consumers. Its models include the ES8 SUV, ES6 crossover vehicle, and EC6 sedan. The ES6 is its bestseller.

Battery Development

Research and development along with innovation in battery technology are vital to stay ahead in this fast-moving world. NIO is hot in this area and has just brought out its 100-kwh battery pack. This battery features thermal propagation prevention, improved range, a highly integrated design (saving space by nearly 20%), all climate thermal management and its bi-directional cloud BMS. All-in-all it gives added flexibility and potential savings to NIO owners.

It’s also now believed artificial intelligence (AI) has a big part to play in speeding up battery developments. AI can do things in a fraction of the time it takes humans, and many battery improvements hinge on evaluating large swathes of data. Something AI can do rapidly to help improve EV range and distance.

Steady income stream

Part of NIO’s money-making strategy is using a subscription model. This means consumers buy the vehicle, then pay a monthly fee to use the battery pack. The newest battery offering comes as an optional upgrade to NIO owners’ existing subscriber plans.

Consumers love the flexibility of subscription-based purchases, and sellers enjoy the regular income. We’re well accustomed to monthly cell phone payments. And now streaming services for on-demand TV from Netflix Inc (NASDAQ: NFLX)  or fitness from Peloton Interactive Inc (NASDAQ: PTON) are commonplace. It makes sense for NIO to go down this route. The arrival of these new and improved batteries entices owners to upgrade their plans because in the long-run the new battery should offer better affordability. Thus, creating a win-win for both parties.In other news, a Biden victory is also likely to hasten battery development as his favourable stance on climate change and sustainability should speed up moves in this space.

Robert – stock.adobe.com

High-profile Backers

NIO has some noteworthy investors giving it clout. Tech giant Tencent and firms Hillhouse Capital Group, Sequoia Capital and a private equity fund established by Baidu Inc (NASDAQ: BIDU). These firms have also invested in other EV start-ups, including WM Motor Technology Co and Xpeng Motors (NYSE: XPEV).

NIO is now worth more than General Motors Company (NYSE: GM). It has a market cap edging towards $60 billion, far surpassing GM’s $55 billion. GM is following suit into the EV market, with plans for an electric Hummer and possible collaboration with Nikola Corporation (NASDAQ: NKLA) to manufacture its Badger pickup truck. However, Nikola is in the midst of a legal battle, facing fraud claims.

In October JP Morgan gave NIO the green light when it said it expects it to be a long-term winner among Chinese brands. While NIO is doing well in the US, Tesla is equally enjoying a successful ride in China.

Green is the future

Investors are now looking beyond valuations with respect to underlying deliveries. The promise of a sustainable vision seems to be all that’s needed for investors to stump up a premium for a piece of the future.

In a study carried out by McKinsey & Company, it found that the EV market is much more likely to see a quick recovery and strong growth in China and Europe than in the United States. Over the long term, EV market share is also more likely to increase in China and Europe. Results of this study were released in September and since September 1, NIO’s share price has risen over 126%.

There appears to be plenty of confidence in the stock to back up its recent run up. Whether this will be enough to keep it buoyant remains to be seen. Until the pandemic is under control and the new US president takes office, uncertainty is likely to cause volatility in the markets. In any case, EV stocks are likely to be hot property for some time to come. It’s an interesting stock to keep an eye on.

Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

  • Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
  • Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.
  • Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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