Nio stock: Is this rally just another head fake?

Nio (NYSE: NIO) stock is firing on all cylinders, but this is a movie we’ve seen before, and it won’t necessarily have a happy ending. Still, with seemingly plenty of headroom for further share-price gains, stock traders are interested in Nio’s upside potential.

It’s amazing to think that Nio stock is a favorite among traders now, considering that the China-based automaker was on the brink of ruin during the COVID-19 crisis in 2020. The times have changed though, and Nio has apparently evolved into a serious threat to Tesla (NASDAQ: TSLA) and other new-energy vehicle rivals.

Are you on board with battery swapping?

Before delving into Nio’s operational and financial figures, prospective investors should seriously consider whether they’re prepared to “ride or die” with battery-swapping technology. That’s because Nio is going all in on battery swapping, which involves switching out a depleted electric vehicle (EV) battery for a fully charged one instead of plugging it into a charging station.

Most well-known EV manufacturers, including Tesla, have rejected this type of technology for various reasons. Among those reasons are questions about battery swapping’s cost effectiveness and doubts that it will gain traction among EV drivers who are already accustomed to using charging stations.

In contrast, Nio is branching out from just making vehicles to upending the EV battery market as we know it. It’s a risky move, as it will undoubtedly require capital, both financial and human, to advance a fairly new technology with no guarantee that it will gain widespread adoption.

Nevertheless, Nio is forging ahead with battery-swapping tech partnerships with two different companies, Zhejiang Geely Holding Group and Changan Automobile. These partnerships indicate that Nio probably doesn’t have the wherewithal to develop this type of technology single-handedly or even with only one collaborator.

What prospective investors should think about is whether Nio, a consistently unprofitable business, can really afford to take on the role of an EV technology pioneer. After all, it’s not 2021 anymore, and the days of easy money and low borrowing costs are over, at least for the foreseeable future. In addition, EV demand isn’t as robust as some market participants hoped it would be.

In other words, this is a time for stock investors to be selective. If Nio’s battery-swapping ambitions don’t pan out, it could dig itself into an even deeper financial hole. That’s a disconcerting scenario amid the fiercely competitive EV industry.

A November and December to remember

If you’re on board with Nio’s risky foray into battery swapping, then the next step would be to delve into the company’s most recent updates. First, there’s Nio’s November vehicle-delivery update, which looked pretty good but still disappointed investors.

Here’s the scoop. In November, Nio delivered 15,959 vehicles, up 12.6% year over year. There’s nothing terrible about that result, but NIO stock fell in the wake of this update.

Presumably, stock traders expected Nio’s EV deliveries to grow at a faster rate. In comparison, Li Auto’s (NASDAQ:LI) November vehicle deliveries grew 172.9% year over year while XPeng’s (NYSE:XPEV) deliveries increased by a mind-blowing 245%.

These growth rates put Nio’s 12.6% to shame. On the other hand, Nio’s November EV-delivery growth rate seems more sustainable than Li Auto’s or XPeng’s. If the market views triple-digit growth-percentage rates as normal nowadays, that’s the market’s problem, not Nio’s.

Turning to December, Nio just released its unaudited third-quarter 2023 results. The automaker delivered 55,432 EVs, up 75.4% year over year. That’s not triple-digit growth, but it shouldn’t disappoint any reasonable investor.

Indeed, NIO stock is perking up now after a rough patch in August through November. Are skeptical investors finally favoring Nio?

Perhaps they should consider taking a share position in Nio as a fixer-upper or a potential comeback story. Notably, Nio’s total revenue jumped 46.6% year over year to the equivalent of $2.61 billion in 2023’s third quarter. Thus, the big picture looks bright, even if short-term stock traders didn’t like Nio’s November stats.

Granted, profitability remains elusive for Nio. The company sustained a 4.56 billion RMB net earnings loss (US$6.25 billion) in Q3 2023, though that’s an improvement over Nio’s 6.06 billion RMB net loss in the year-earlier quarter.

Going forward, investors should hope to see Nio continue to close the profitability gap. It’s certainly not necessary for the automaker to grow its vehicle deliveries by triple-digit percentages.

All in all, the recent pop in NIO stock looks like the real deal rather than just a head fake. Thus, it’s not a terrible idea to hold a few Nio shares — as long as you understand the risks involved with the company pursuing battery-swapping technology.