For contrarians, the significant decline of Chinese EV manufacturer NIO (NYSE:NIO) seemingly presents a bargain opportunity. In recent years, China has become a true powerhouse in the electric-powered mobility game. Still, recent developments suggest that there are rising concerns in Asia’s economic crown jewel. As a result, investors need to think extremely carefully about the supposedly cheap automaker. Regrettably, the evidence forces me to lean bearish on NIO stock.
NIO Stock Attracts High-Level Contrarians
Last month, analysts at JPMorgan Chase (NYSE:JPM) issued a rather blunt recommendation to investors, urging them to sell NIO stock. Specifically, Nick YC Lai cut his rating to Underweight from Neutral while slashing his price target by 41% to $5. Previously, the expert carried a price target of $8.50.
Raising eyebrows even further, Lai admitted that his downgrade was “admittedly a late one,” given the steep descent of NIO stock. Nevertheless, the timing also appears to reaffirm his confidence in the downside rating. Slow January sales combined with investor concerns over revenue and profit trajectories in 2024 reflect severe pessimism.
However, it’s noteworthy that not all high-level sources share the same downcast view. In contrast, Morgan Stanley (NYSE:MS) analyst Tim Hsiao believes that the company is taking steps to improve the overall business. Part of the contrarian viewpoint centers on the greater expansion of NIO’s battery swap network to help encourage EV adoption.
In fairness, as TipRanks reporter Marty Shtrubel pointed out, some investors doubt NIO’s ability to return to its high benchmark of 20,000-unit monthly sales. Still, the leadership team is optimistic. “The company believes the nationwide urban rollout of its ADAS (advanced driver assistance system) software, NOP+ (Navigate on Pilot Plus), in Q2, and the expanding power swap network (projected to reach 3,400 locations by year-end) will support a gradual recovery from Q2 onwards,” wrote Shtrubel.
Further, the reporter mentioned, “The company has suggested that promotions for the 2024 model upgrades will likely focus on NOP+ free trials and power swap coupons rather than reducing prices, as such promotions are seen to have minimal effects on NIO’s brand and profitability.”
At a cursory glance, the narrative seems feasible. However, the problem is that the EV industry globally – and in particular, the Chinese space – is rapidly becoming commoditized. With little but price to play on, this dynamic may put NIO stock in a bind.
The Novelty Factor Gives Way to Commoditization
Moving forward, the fundamental vulnerability for NIO stock and perhaps most other EV manufacturing investments is commoditization. It’s really a dance with the devil. The electrification narrative is initially appealing because electric motors feature fewer moving parts than combustion engines. In turn, it’s easier for companies – especially Chinese manufacturers – to churn out EVs like no one’s business.
However, what happens when the initial novelty effect of electric mobility wears off? At that point, EV makers must compete on distinction. Unfortunately, EVs fail in this department because – let’s face it – they all sound the same. And many look the same, too.
Interestingly, Italy’s government revolted against the European Union’s plan to tighten vehicle emissions limits. It wants to protect the traditional automotive industry for largely economic reasons. However, I suspect that the Italians are also pushing back because EVs lack character. True automotive aficionados recognize the sonorous quality of an Italian exhaust note a mile away. The same can’t be said about the whirring of an EV.
It’s a subjective argument, granted. What’s not subjective, though, is that as EV production ramps up, consumers will have plenty of options. When you remove brand heritage and the aural element from the equation, there are objectively fewer areas of distinction – other than price – that can help NIO stock.
To be fair, Nio’s battery-swapping technology does offer a distinguishing factor. However, that’s a very costly directive. While it may offer a convenient alternative to public charging solutions, if more people buy EVs, there may not be enough of these swapping stations.
Further, it’s no guarantee that EV adoption will pick up significantly. As The Wall Street Journal reported last month, Chinese consumers have reduced their spending, resulting in a demand slowdown for vehicle sales.
Not Equipped for a Price War
Finally, the specific concern about commoditization for NIO stock is that the underlying company isn’t financially equipped for such battles. Whether you look at the company’s performance from a GAAP perspective or non-GAAP adjusted basis, NIO loses money.
Yes, Tesla (NASDAQ:TSLA) started a nasty price war that impacts the global EV space. However, Tesla is profitable, so it can wage this battle more easily. Plus, the company enjoys a longer operating history and thus enjoys brand cachet. As a result, it distinguishes itself from the competition. That’s just not the case for NIO, which makes the investment suspect.
Is NIO Stock a Buy, According to Analysts?
Turning to Wall Street, NIO stock has a Moderate Buy consensus rating based on seven Buys, seven Holds, and one Sell rating. The average NIO stock price target is $7.09, implying 28% upside potential.
The Takeaway: NIO Stock May Face Challenges with Its Second Act
NIO stock has seen impressive performance earlier, but as it moves onto its second act, the underlying company may face significant challenges. Though management is optimistic, the reality is that EVs lack distinction, thereby making them vulnerable to commoditization. That’s occurring amid a slowdown in Chinese consumer spending. With NIO operating in the red, it’s not equipped to handle the implications of an ongoing price war.
