There are a number of options to invest in Nio, apart from investing directly in its ADRs listed on the NYSE and the SGX, investors can also consider CFDs and ETFs, which have sufficient exposure to Chinese automotive upstart.
The Shanghai-based automaker, Nio, also referred to as the Tesla of China, or even the “Tesla Killer,” is one of the most recent arrivals in the burgeoning global EV market. Since making its first deliveries of the EP9 in 2016, and the ES8 in 2018, the carmaker has launched 5 more models in a relatively short period, with 4 more models set to commence production this year.
The company is known for being one of the early pioneers of battery-swapping technology, as a quicker and more effective alternative to conventional charging stations. Nio has since made steady gains in the EV market, with 10,800 vehicles sold in September 2022, up from 8,000 units sold for the full year in 2018, as the company makes a historic push to expand into European and North American markets
Nio Stock and Corporate Overview
Nio was founded by serial entrepreneurs William Li and Lihong Qin in 2014, with its first unveiling in the Saatchi Gallery in London in 2016. Over the years, the company has raised $5.4 billion in funding from 10 rounds, and 12 lead investors, including Tencent, Temasek, Lenovo, Sequoia, and TPG, before listing on the NYSE in 2018, with subsequent listings in the Hong Kong Stock Exchange and the SGX in Singapore.
The company has three other divisions, namely Nio Life, a lifestyle brand that aims to capitalize on the brand’s growing popularity, and has since launched its fashion label “Blue Sky Lab.” This is followed by Nio Service, the company’s network of service centers, and Nio Power, its network of battery swap stations, totaling around 900 in China, with power mobile, power home, and superchargers.
In August 2020, Nio launched a battery-oriented asset management company in partnership with the Hubei Science and Technology Investment Group, and a few other investors, to provide battery-as-a-service solutions for Nio customers. With this, customers need not pay excessive amounts to acquire EVs with the battery, but instead can just lease the battery for a monthly subscription.
Initiatives such as this have the potential to fundamentally enhance the prospects of EVs by bringing them into the reach of the masses. This further represents a significant moat to one-up competitors, especially the likes of Tesla. While the prices of the automaker remain on the higher end, starting at $52,000, it remains well below the Model X SUV at $80,000 and the Rivian R1T at $68,000.
Since its listing in U.S. markets in 2018, the stock witnessed a monumental 526% rally, from $9.90 per share to $64.60 at its peak in February 2021. However, since then, the stock remains down by over 60% YTD (Year-to-Date), and over 70% since its peak last year. While the rally in 2020 was premature, and unfounded at best, Nio’s steep decline can be attributed to a wide range of macro factors.
At its peak, Nio’s market capitalization reached $95.93 billion, an unjustifiably high valuation for a company that reported $5,670.6 million in revenues, and a loss of hundreds of millions of dollars for the full year in 2021. Following the selloff, the stock currently trades at just a few dollars more than its IPO price in 2018, and as such can be a great opportunity for investors who missed out on the stock two years ago to get in on it now.
While the company remains robust when it comes to tech, innovations, and fundamentals, there are a few other factors that investors need to consider. At the moment, while it continues to grow exponentially, it is also faced with monumental macro headwinds and challenges which continue to weigh on the stock, prompting investors to remain cautious while dealing with the company.
Reasons to Invest in Nio
On the face of it, the reasons to invest in Nio right now are quite straightforward. It has quickly emerged as one of the leading car manufacturers in China, with highly rated models, and solid sales growth year-over-year.
- For a company that started with just over 11,000 cumulative deliveries in 2018, it has delivered 259,563 cumulatively as of October 31, 2022, and it remains to meet and possibly exceed projections, with revenues scaling from $2,442 million to $2,703 billion forecasted for 2022, a monumental increase of 75.4% to 94.2%.
The company has a string of innovative new products and solutions that transcend the trillion-dollar global auto market.
Nio also plans to launch a smartphone brand, bundled with its vehicles, and fully integrated with the in-built operating system, resulting in substantial moats in the face of intensifying competition.
The customer-centric, community-oriented design has helped the company overcome several challenges that are often encountered by newer entrants in this industry.
Like most other EV majors, Nio has robust secular tailwinds in its favor, with activism surrounding climate change continuing to intensify, and most world powers planning to shift away from fossil fuels in the coming two decades, with California already banning new gasoline-powered cars starting from 2035.
Apart from this, the company also remains poised to benefit from the extensive subsidies being offered by governments across the world.
The Hefei city government and other Chinese public sector companies alone have provided it with a lifeline worth about $1.4 billion to tide over the COVID-19 pandemic.
Reasons Not to Invest in Nio
While at current valuations the stock seems like a slam dunk for growth and value investors alike, there are a few critical factors that continue to weigh it down, which investors should remain cautious about.
- Nio doesn’t just compete against the likes of Tesla, Geely, and Rivian, but even the decades-old legacy car manufacturers who have started going all-out when it comes to EVs. China alone has over 400 new electric vehicle startups that have since achieved varying degrees of success.
The stock continues to be weighed down by the political uncertainty in China, especially with the country moving towards a one-person rule in recent months.
Things have been further exacerbated by geopolitical tensions between China and the U.S., as well as the possible war in Taiwan, making this stock a high-risk proposition.
Most U.S.-listed Chinese stocks have witnessed a selloff in recent months, as Xi Jinping’s China is increasingly being viewed as uninvestable. Many of them trade at mouthwatering valuations, but there are plenty of reasons to remain pessimistic, nonetheless.
Another key concern for investors has been its lack of transparency on various issues, something that plagues most China-based companies.
In 2018, the company told investors that it was building a new factory in Shanghai; however, in 2019, it came to light that the project had long been scrapped, and was never going to be built.
How to Invest in Nio
If you still believe that Nio is a worthy addition to your portfolio, there are several ways to gain exposure to this automobile trailblazer.
Depending on your location, risk profile, and how you plan on managing the position, among other things, you can choose from the following options to get started.
Nio shares are listed on the NYSE as American Depository Receipts (ADRs), which are essentially securities that represent ownership in a foreign company. They are issued, and the underlying security is often held by a U.S.-based financial institution and the security trades and issues dividends in U.S. dollars.
This, however, comes with its share of risks, considering that the strengthening U.S. dollar can result in losses for investors, even if the underlying stock gains in the overseas exchange.
Nio’s ADRs are traded on the NYSE with the ticker symbol NIO, and investors can buy units of this ADR with any of the innumerable trading applications and brokerage accounts to get started. The company has adopted a similar mode of listing on the SGX in Singapore, with depository receipts trading on the market, representing units of ownership in the company.
CFDs, or contracts for difference. are essentially over-the-counter (OTC) derivative products that don’t trade on any major exchanges such as the NASDAQ or NYSE. Instead, these are mostly contracts between buyers and sellers to settle the difference between the opening and closing price of trade on the underlying security.
A number of CFD brokers offer Nio contracts for buyers, with prices accurately tracked with those on the exchange, and the possibility for leverage, with no fixed expiry like other derivatives contracts.
ETFs, Mutual Funds, and Index Funds
If you don’t want to directly purchase and own shares in Nio, it is still possible to gain exposure to the stock by investing in a wide range of index funds, mutual funds, and ETFs.
There are currently 80 ETFs that own the Nio stock, with varying degrees of exposure. For a more focused investment in the stock, ETFs such as the KraneShares MSCI China Clean Technology Fund, Invesco Golden Dragon China ETF, or the VanEck Low Carbon Energy ETF should do well.
With a wide range of options such as ADRs, CFDs, and ETFs, there are plenty of ways to invest in Nio and get in on the ground floor of a fledgling automobile company. While it promises substantial upside in the years to come, there are certain macro and company-specific risks that can play spoilsport.
The image featured at the top of this post is ©Andy Feng/Shutterstock.com.