Updated: Dec 27, 2020
Is Nio is the better way to profit from China’s growing market for electric cars, according to Jeff Reeves a MarketWatch columnist.
Two of the most popular stocks on the planet right now are electric vehicle manufacturers Nio and Tesla. Together, they trade about 200 million share daily, thanks in large part to young individual investors hungry for a piece of the action.
But these stocks are decidedly not the same. Tesla TSLA, -1.03%, which went public at a mere $17 a share more than 10 years ago, has been through the Wall Street wringer, while Nio NIO, +6.15% made its debut in U.S. markets a little more than two years ago. Tesla is U.S.-based, with a cult-like following in American car culture and a quirky CEO, while Nio is a Shanghai-based EV company that doesn’t have the same amount of fireworks around its brand.
Both picks have a lot of long-term potential as they are core players in the long-term growth of the electric vehicle market. But if I had to pick just one to purchase at this price and hold for all of 2021, my money is on Nio over Tesla.
Nio’s secondary offering was well-timed and appropriate: Some investors panned Nio’s recent secondary offering in December as a blatant money grab to capitalize on its skyrocketing share price.
Public markets fundamentally exist so companies can raise capital to keep growing, and the $2.6 billion windfall for Nio was the right move at the right time. Nobody held a gun to anyone’s head and demanded they pay $39 a share. That was a fair price — and in truth, more than 7% below market rate at the time.
If you hate secondary offerings, you hate Tesla too: While we are on the topic, does nobody remember a similar move from Tesla less than a year ago, where the firm raised $2 billion on shares priced at $767 (pre split)? Or a $2.7 billion secondary offering and bond issuance in 2019? Or how about a September SEC filing that said Tesla will sell even more shares “from time to time” and “at-the-market” prices to keep raising cash? Followed by that $5 billion it raised this month?
If you think Nio’s supposed share dilution is a death knell, it’s time to review the headlines from Tesla.
Tesla is not shorthand for EVs: As an analyst at Roth Capital Partners said in November, “Tesla is an umbrella stock” that is tied to all other names in the sector.
I don’t dispute that, but I don’t see it as a good thing. While it certainly has a more direct link to electric vehicle adoption than a legacy automaker like Ford Motor F, +2.69% that is still lagging way behind the pack, it is dangerous to think that more EV sales definitively means an ever-increasing market value for Tesla.
Just at the tech bubble separated the powerhouses like Google GOOG, +0.44% GOOGL, +0.50% from pretenders like theGlobe.com TGLO, +18.18%, eventually markets will stop buying the trend and start looking at individual stocks. That could be dangerous for Tesla given its sky-high valuation.
Tesla has a long way to go in China: Though much fanfare has been made about China-made Model 3 vehicles, Tesla only sold about 21,600 of the cars in November. That was good enough to be No. 3 in market share, but certainly not the game-changer — and less than one-third of the monthly run-rate necessary for forecasts of 880,000 China-made EVs by the end of next year.
Where’s Tesla’s China explosion?: Total electric vehicle sales in China are living up to expectations, with November’s tally surging more than 130% to 169,000 units. While Tesla dominates the U.S. market, its 21,600 units sold in China is a very tiny sliver in a crowded field. What’s more, the raw China growth rate for Tesla may be impressive at 45% more vehicles sold compared with the 15,000 vehicles it sold in June, but it’s really hard to get excited about a measly 6,000 more vehicles produced after six months when the stock is valued at more than $600 billion.
Nio’s growth is for real, from a smaller base: So far in 2020, Nio has admittedly only delivered 36,700 total vehicles. But that’s more than 110% more than 2019’s tally — and it’s aggressively investing to keep production ramping higher.
While Tesla’s China growth has to be digested as part of an established multinational company operating in the U.S. and Europe, Nio can capitalize on the China opportunity directly. If you recall the early days of Tesla, the EV manufacturer sold people on the promise that 30,000 deliveries could become 300,000 in just a few years — and Nio appears to be tracking that growth plan, too.
Nio has ties to state-owned allies: Recently, Nio signed a deal with State Grid Electric Vehicle Service Co, a part of China’s massive state-owned utility. The plans are modest — to jointly build only about 100 charging and EV service stations in 2021 — but show that Nio is doing what all successful Chinese stocks must do, which is to win favor with state-owned allies to continue growing its business and squeezing out competitors.
Meanwhile, Tesla’s factory is 100% American owned — and while Chinese banks provided the $1.4 billion loan for the facility, that’s far different than a business partnership with partners in Beijing.
Nio doesn’t have Tesla’s hype machine: There is no middle ground on Tesla. Right now, Goldman Sachs has a price target of $780 on the stock while JPMorgan Chase’s is $90. Hedge-fund icon Jim Chanos put it aptly on Bloomberg TV recently, saying Tesla is worth “whatever people want to believe Elon Musk is touting.”
If you enjoy this kind of meta investing, trying to think about what other people are thinking about what Musk is thinking about, then focus on Tesla. But for many investors looking to cut through the noise and simply play the growth potential of China EVs, Nio is an option that sidesteps some (though admittedly not all) of the hysteria you’ll frequently find around Tesla these days.
Jeff Reeves is a MarketWatch columnist. He doesn’t own shares in either Tesla or Nio.