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For contrarians, the huge drop in Chinese EV maker NIO (New York Stock Exchange:Nio) appears to offer a bargain opportunity. In recent years, China has become a real powerhouse in the electric mobility game. Still, recent developments suggest growing concern about Asia’s economic crown jewels. As a result, investors should consider this potentially undervalued automaker very carefully. Unfortunately, the evidence forces me to be bearish on his NIO stock.
NIO stock attracts high-level contrarian stocks
Last month, JPMorgan Chase analyst (New York Stock Exchange:JPM) issued a fairly straightforward recommendation to investors, urging them to sell their NIO stock. Specifically, Nick Y.C. Lai lowered his investment rating from “neutral” to “underweight,” while lowering his price target by 41% to $5. Previously, experts had a price target of $8.50.
Lai further frowned, admitting that the downgrade was “obviously overdue” considering the steep decline in NIO stock. Nevertheless, the timing also appears to reaffirm his confidence in the downside rating. In addition to sales weakness in January, investor concerns about the trajectory of sales and profits in 2024 reflect deep pessimism.
However, it is worth noting that not all high-level sources share the same outlook. In contrast, Morgan Stanley (New York Stock Exchange:MS) Analyst Tim Hsiao believes the company is taking steps to improve its overall business. Some of the contrarian views focus on the significant expansion of NIO’s battery exchange network to encourage EV adoption.
To be fair, as TipRanks’ Marty Strubel pointed out, some investors are questioning NIO’s ability to return to its lofty benchmark of 20,000 units per month. Still, management remains optimistic. “The company expects its ADAS (advanced driver assistance system) software, NOP+ (Navigate on Pilot Plus), to be rolled out nationwide in urban areas in the second quarter, and to expand its power exchange network (expected to reach 3,400 locations by year-end). With expansion, there has been a gradual recovery since the second quarter,” Strubel wrote.
Additionally, the reporter said, “The company has indicated that promotions for 2024 model upgrades are likely to focus on NOP+ free trials and power swap coupons rather than price cuts. This is because the impact on profitability is considered to be minimal.”
At first glance, this story seems possible. The problem, however, is that the EV industry around the world, especially in China, is rapidly becoming a commodity. This dynamic could put his NIO stock in trouble, as there is little at stake other than price.
Elements of novelty give way to commoditization
Going forward, the fundamental vulnerability of NIO stock, and probably most other EV manufacturing investments, is commoditization. It’s a dance with the devil. The electrification story is initially appealing because electric motors have fewer moving parts than internal combustion engines. As a result, it will be easier for companies, especially Chinese manufacturers, to mass-produce EVs like nobody else’s business.
But what happens when the initial novelty of electric mobility wears off? At that point, EV manufacturers must compete on differentiation. Unfortunately, EVs fail in this area. Because, let’s be honest, all EVs sound the same. And many people look the same way.
Interestingly, the Italian government has balked at the European Union’s plans to tighten vehicle emissions regulations. The company wants to protect the traditional car industry, mainly for economic reasons. However, I think Italians are also against EVs because they lack individuality. True car enthusiasts recognize the resonant sound of an Italian exhaust that can be heard from a mile away. The same can’t be said about the whirring sound of EVs.
Admittedly, it’s a subjective argument. But what is less subjective is that as EV production increases, consumers will have more choices. When you remove brand heritage and aural factors from the equation, there are objectively fewer areas of differentiation other than price that could help NIO’s stock price.
To be fair, Nio’s battery swapping technology does offer a differentiating factor. However, this is a very expensive instruction. While they may provide a convenient alternative to public charging solutions, as more people buy EVs, there may not be enough of these swapping stations.
Furthermore, there is no guarantee that EV penetration will increase significantly.as wall street journal It was reported last month that Chinese consumers are cutting back on spending, resulting in weaker demand for car sales.
unable to withstand price competition
Finally, a specific concern about the commoditization of NIO stock is that the underlying company is not financially equipped to withstand such a battle. Whether you look at the company’s results from a GAAP perspective or on a non-GAAP adjusted basis, NIO is losing money.
Yes, Tesla (NASDAQ:TSLA) has started a nasty price war affecting the global EV industry. But Tesla is profitable, which makes this fight easier. In addition, the company enjoys a reputation as a brand due to its long history in business. As a result, you can differentiate yourself from your competitors. This is not the case with NIO, which makes the investment questionable.
Is NIO stock a buy, according to analysts?
Turning to Wall Street, NIO stock has a Moderate Buy consensus rating, based on 7 buys, 7 holds, and 1 sell ratings. NIO’s average price target is $7.09, suggesting 28% upside potential.
Lesson: NIO stock could face challenges in the second act
NIO stock has had a great performance so far, but the underlying company could face significant challenges as it moves into phase two. Despite management optimism, the reality is that EVs lack differentiation and are susceptible to commoditization. This situation is occurring as China’s consumer spending slows down. NIO operates at a loss and does not have the ability to deal with the effects of ongoing price competition.
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