Is This Chinese Tesla Rival a Buy?

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Shares of Chinese electric-vehicle maker NIO, Inc. (NYSE: NIO) jumped 22% on Tuesday after fund manager Baillie Gifford & Co. disclosed in a regulatory filing that it had taken an 11% stake in the company.

That's significant because Baillie Gifford is one of Tesla's (NASDAQ: TSLA) largest investors. The announcement of its stake in NIO was apparently enough of a vote of confidence to encourage quite a few buyers to jump in. Should we join them?

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NIO's stock price has been quite volatile

NIO's shares have had a bumpy ride since the company went public in the U.S. on Sept. 12. NIO's IPO was priced near the bottom of its expected range, suggesting weak demand -- but then its shares soared in the days after its debut. They've been up and down -- or more correctly, down and then up -- since.

Why NIO stands out in a crowded field

China's government has done more than most to encourage the production and sale of electric vehicles. Its efforts are succeeding: By some estimates, there are over 300 companies purporting to be electric-vehicle makers in China right now; about 50 are thought to be serious and credible.

It's a crowded field, but NIO stands out for a few reasons. For starters, the company is backed by heavyweights: Chinese internet giants Tencent Holdings and Baidu both hold sizable stakes in NIO through subsidiaries.

Another reason NIO stands out: Unlike some other high-profile electric-vehicle start-ups, including Faraday Future and Lucid Motors, NIO has a vehicle in production right now. The NIO ES8, a high-performance seven-passenger battery-electric SUV, went into production in late June. As of the end of August, NIO had delivered 1,602 ES8s and was working to fill a backlog of over 15,000 reservations (with deposits).

For now, NIO's vehicles are being built under contract by Chinese automaker JAC Motors, which has the capacity to build about 120,000 NIOs per year. NIO plans to lease a factory that is currently under construction in Shanghai; it's expected to be up and running sometime in 2020.

About NIO's first vehicle, the ES8 SUV

NIO sees Tesla as its primary competition, and the ES8 is clearly inspired by NIO's Silicon Valley rival. The ES8 is an upscale SUV with dual motors, all-wheel drive, and brisk acceleration. It's loaded with high-tech features, including a proprietary Level 2 advanced driver-assist system and a voice-activated "in-car AI connected assistant" called NOMI.

The ES8's rated range isn't quite up to Tesla's -- it's 355 kilometers (220 miles) under the generous NEDC standard -- but the rest of the package is arguably in Tesla's ballpark. And it beats Tesla's Model X soundly on one front: At a starting price of 448,000 yuan (about $65,300), the ES8 costs about half of what a Chinese customer would pay for the base 75D version of the Model X.

NIO isn't profitable yet, but revenue should grow sharply

NIO lost $502.5 million in the first half of 2018. But remember that its first vehicle began shipping late in June, just before the end of the second quarter. NIO generated just $7 million in revenue in the first half. Profits may not arrive for a while, but revenue should grow quickly as vehicle production ramps up.

Thanks to the IPO, NIO should have enough cash to hold it for a while. It expects to spend about $600 million over the four quarters that began on July 1, but it can fund that (and then some) out of its current cash hoard. NIO had $668 million in cash as of the end of the second quarter, before the IPO. Net of fees, the IPO probably yielded an additional $950 million.

Is NIO a buy?

On the one hand, NIO has a lot going for it: Cash in the bank, a promising vehicle in production, and a second model (a smaller premium SUV called the ES6) due next year. On top of that, new tariffs have made it harder for Tesla to compete in China for the time being, giving NIO a window of opportunity.

On the other hand, auto sales in China have fallen over the last few months, suggesting that the industry may be headed for a slump. For a still-tiny company like NIO, a slumping market could make for tough going.

Still, it seems clear that demand for electric vehicles in China will rise sharply over the next several years. And NIO has started off with the right kinds of products: Chinese buyers love upscale SUVs at least as much as their American counterparts. For investors looking to take a stake in the upcoming Chinese electric-vehicle boom, NIO could be a very good bet.

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John Rosevear has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends BIDU, TCEHY, and Tesla. The Motley Fool has a disclosure policy.