Fresh Off a Bailout, Nio (NYSE: NIO) stock Is Piling Up the Wins

It’s fair to say that I didn’t see the share price of Nio (NYSE: NIO) stock doubling since July 1. Watching Nio for much of the last year has given me reason to question their long-term future. But Nio is impressively stacking win upon win.

Their most recent win is in deliveries. Right before the holiday weekend in America, Nio announced it had delivered 3,740 vehicles in June. That was a 179% year-over-year increase. It was also the company’s best month and rounded out its best quarter.

The company also looks to have an impressive win in its commitment to battery swapping technology. More on that in a bit. All of this supports the current bullish thesis for Nio.

However, I still wonder what will happen to the brand as it becomes more closely aligned with the Chinese government.

A Deal Nio Had to Make

Let’s face facts. The simple truth is that Nio was a cash-strapped company. This wasn’t just idle speculation by investors. The company acknowledged in January that it didn’t have enough operating capital to get through the year. In fact Nio had to borrow money to make its payroll. And China was under lockdown measures to combat the novel coronavirus.

It’s not like investors didn’t have a reason for skepticism. The company needed a bailout. And it got one. And it was a big one. In February, the company signed a deal with the Chinese city of Hefei. This deal pumped $1 billion into a subsidiary called Nio China.

As Michael Dunne, head of ZoZo Go, an automotive consulting group told The Verge, “At a certain point there comes a day of reckoning where (Chinese companies) are just hungry for cash and they look around and say ‘What are our alternatives here?’ And the final backstop is the government.”

For China’s part, Dunne continued, “China wants to lead the world in electric vehicles, and they have the wherewithal to provide Nio with the cash lifeline to allow it to proceed with its dream.”

But the deal comes with some significant strings attached. First, Nio has committed its “core businesses and assets in China” into this new subsidiary. The company has to put $600 million of its own money into Nio China. And, the company will be building a new headquarters, specifically for Nio China, in Hefei.

But here’s where the deal becomes a bit more problematic.

The group of investors that provided the funding owns 24% of Nio China. That leaves Nio, Inc. the holding company at the top of Nio’s corporate structure. This allowed Nio to reassure investors that Nio is in fact calling the shots. The company has gone so far as to tell investors they will own this controlling stake for the long term. And, in theory, they’re right. But there are stipulations written into the deal that could put Nio in a situation where it loses control of the company.

This Technology is Giving Nio a Charge

One of the key issues in accelerating the acceptance of the electric car market is a built-out infrastructure that will allow customers to recharge or replace their battery. There are two schools of thought. Tesla (NASDAQ: TSLA)continues to build out charging stations. Nio is focusing on battery swapping technology. Nio considers this a key part of what it terms its “chargeable, swappable, upgradeable” user experience.

Steve Hanley of CleanTechnica described it as follows, ”Not only do drivers get a fully charged battery, they also get a complimentary inspection of their car’s electric powertrain. Battery swapping also means customers always have the latest battery technology available to them and they can choose to upgrade to a larger, more powerful battery at any time. Drive in, drive out. Easy!”

A key point to make here is that the Chinese government made an exception in their subsidy policy for companies that use battery swap technology.

The Bottom Line on Nio

Nio has ample liquidity and now has to deliver, literally. I’m bullish about the long-term future of the electric vehicle market. Many people were must have been buying or taking delivery of Tesla’s during the pandemic. Because as the nation reopens, I’m seeing more Tesla’s than ever before. And I don’t live in an area where you would think that was true.

Nio, on the other hand, is operating in a country where electric vehicles are already becoming mainstream. If they can continue to hit their sales targets, they may become one of the all-time success stories.

But I still question how autonomous the company will be allowed to be.  An analyst from Goldman Sachs (NYSE:GS)just issued a downgrade for Nio despite raising its price target. This may mean nothing. But it does mean there’s at least some sentiment that Nio stock is a little overheated.

Successful investing requires the ability to process all the information surrounding a stock.  I can’t say you shouldn’t invest in Nio (in fact, you probably should). But there is a bigger story here that bears watching.