Nio Stock Is in Bubble Territory But There’s More Room to Run

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One of the pivotal reasons why electric vehicles have soared this year is due to their relative simplicity. Historically, Chinese automobile manufacturers attempted to compete with their Japanese and Korean counterparts, only to be met with failure. The reality is that making quality internal combustion engine cars is difficult. But with EV batteries, most of that complexity is sidestepped, bolstering the fundamentals case for Nio (NYSE:NIO) stock.

a sports car made by Nio

Essentially, EVs have fewer moving parts than combustion cars. By removing that component and replacing it with a lithium-ion battery pack, the heart of the EV becomes commoditized. However, that also removes most of the character of a car. Although I can’t say for certain, I’d bet that’s why Ferrari (NYSE:RACE) doesn’t want to build an EV. For the iconic exotic car company, character is one of the reasons why it’s in the business.

But Nio doesn’t care about that. Instead, it’s about making green — and if helps keep our planet green, so be it. More importantly, by having the most difficult aspect of building a car commoditized, the company can instead focus on design. And boy, does it make some very attractive cars. Undoubtedly, this played into the enthusiasm for Nio stock.

However, with shares up almost 655% on a year-to-date basis, it’s fair to wonder if Nio stock is in bubble territory. On the surface, there’s nothing to worry about. According to a report, JPMorgan upgraded the shares to overweight, forecasting a $40 price target.

Not to be outdone, Citigroup analyst Jeff Chung upgraded Nio stock to an equivalent of buy from hold, assigning a price target of $33.20 from $18.10.

Both analysts see a dramatic rise in China’s EV market, which on the surface makes sense. Throughout the world, interest in EVs has soared. As well, charging infrastructure is being built out, making the transition much more accessible. Still, you’ve got to wonder if things are getting a little bit out of hand.

Nio Stock Looks Like a Bubble

When I saw the sharp rise in NIO, I felt that the price action looked familiar. Sure enough, the price action resembles that of another company that I follow closely, Sony (NYSE:SNE).

But for this exercise, we’ll need to go back in time to 1999, specifically from May 19 to Oct. 12. During this period, SNE soared from $38 to over $66, which was fairly remarkable considering that shares were already booming since the early 1990s.

Interestingly, between May 22 to Oct. 15 of this year, NIO enjoyed a much more extraordinary rise, jumping from $3.27 to $28.07. But the main takeaway is that when you stack these two trends together, they share an extremely strong 93.4% correlation coefficient. In fact, when you stack the two trends together, they almost look identical.

In the near term, that bodes very well for NIO stock. You have to remember that flying to $66 was just the start for SNE. It would go on to hit $140 before falling back down to earth.

But why couldn’t Sony keep up the momentum? Here’s the BBC’s analysis on the issue:

Wall Street valued Sony incorrectly for the same reason that Sony continued to misunderstand its own value: In 2000, Wall Street and Sony both believed that Sony was a device maker and that ever-improving devices would rule the world.

The truth has turned out to be more powerful than that. Devices are merely servants, connected to the broadband networks that more than three-quarters of U.S. homes have, or wirelessly connected to the home networks or coffee shop hotspots that have doubled in use since tablets came around.

But even this fact was misread by people at Sony. Sir Howard Stringer himself boasted on stage at the CES 2009 electronics event that 90% of Sony devices would connect wirelessly by 2011.

That still misses the point. A platform world teaches us this truth: it’s not the device that matters, it’s not even the connected device that matters. It’s the connected experience that matters.

Then, this little fruit company called Apple (NASDAQ:AAPL) came along and changed everything.

Click to Enlarge

Could a Disruption Be on the Way?

While I believe that international EV adoption should rise once we get past the pandemic, investors ought to be careful about exposing themselves too deeply to Nio stock. Here’s the reality — the GDP per capita in Beijing, China is 164,000 yuan or roughly $24,479.

Think about that, $24,479. Nio’s “economy” car, the EC6, starts at a pre-subsidy price of approximately $54,000. In contrast, the Tesla (NASDAQ:TSLA) Model 3 starts at around $35,000. But these cars are popular in areas such as Los Angeles, which has a GDP per capita of around $69,000.

Now, with a metric like that, it’s much more believable that people are out buying Tesla EVs. However, with a GDP per capita of only 35% of that figure, it’s less credible to believe that these Chinese consumers will buy EVs that are priced 54% higher.

I understand that Nio is experimenting with a Battery as a Service model. But that only cuts the price down by a little more than $10,000. You would still be talking about a car that costs well over $40,000. And I’m sorry but you cannot buy a car like that when your salary is less than $25,000.

Further, like what happened with Sony, Chinese consumers that are paying that kind of money will want the pizzazz of western luxury brands. For consumer electronics, the biggest catalyst may be the connected experience. But in the automotive world, it’s all about the badge.

Right now, Tesla arguably carries the most prestige. But what happens when Europe’s top car brands start to develop EVs? Or say Toyota’s (NYSE:TM) Lexus brand? And that they start offering their higher-profile cars at equivalent or maybe even lower prices?

We’re probably a few years away from that happening. As well, if Nio stock is indeed tracking Sony’s trend from decades ago, it can hit bonkers numbers. But just be prepared with an exit plan. While nearer-term upside is possible, this is starting to look like a bubble.

On the date of publication, Josh Enomoto held a long position in SNE.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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