Nio (NYSE:NIO) Dilutes the Pot, But Still an Attractive Investment

One of the greatest economic principles around is the notion of scarcity. When something is scarce—or hard to find, if you prefer—it's inherently worth more because it's that much harder to meet demand. Of course, it also depends on there being some demand for the item in question, but still. When the thing in question is common, and it's easy to meet demand, value declines accordingly. That's a point that Nio (NYSE:NIO) is testing out for itself, though it's still got a lot to like involved in it.

Scarcity Buckles

Nio recently announced plans to bring a slug of new shares to the United States, a slug measuring as many as 69 million new shares. Several reports suggest the number will turn out to be closer to 60 million shares, but that's still quite a lot of fresh paper in the market.

While this isn't the first time we've heard of an electric vehicle maker offering up new shares—Tesla (NASDAQ:TSLA) has done it at least once in recent memory, with a third time potentially on offer—the big batch of fresh Nio shares seems to be going over like the proverbial lead balloon. The stock closed yesterday at $45.23, and as of this writing, it's trading at $42.98.

Still, even at $40 a share, if it can sell out its full load, we're still talking about $2.4 billion in fresh capital coming into the market. With electric vehicles on track to be the wave of the future—much more so in some places than in others—having extra capital on hand to ramp up production, engage in deeper marketing, and the like can hardly go amiss.

Investor Confidence Getting Less Scarce

Nio has drawn a lot of attention of late—it's been followed and searched extensively here—but our latest research suggests that the analyst community increasingly agrees with Nio's appraisal of itself. The latest word puts Nio as a “hold,” with one “sell” rating, five “hold” ratings, and six “buy.” That's been trending upward, however; six months ago, the company was at one “sell,” four “hold” and two “buy.” A month ago, it was two “sell,” four “hold,” and six “buy.” This suggests the consensus is actually getting closer to a “buy” recommendation; if one or two of the “holds” tip to “buy”, so too will the consensus rating.

Moreover, the price target has been on an upward streak. Six months ago, the company aspired to $5 a share, coming in at $3.99. Today, it's $28.69, and given that current prices nearly double that figure, there may be further adjustments to come. We've seen some movement on this front already, with Goldman Sachs updating its price target 10 days ago, going from a meager $7.70 per share to $59.

Still Attractive, But For How Long?

The basic principles of supply and demand do still apply. Fundamental principles that fundamental never really disappear. There's always a certain amount of irrationality in the market, though, and it's that kind of irrationality that's giving Nio's share price a little extra help going forward.

However, it's not just irrationality that's giving Nio's shares a ride to greatness. The company has a solid product line, particularly a premium sport utility vehicle (SUV). Customers increasingly prefer SUVs thanks to their flexibility, their styling, and their recently-improved gas mileage; not so long ago, Ford (NYSE:F) stopped production of most every car model to focus on SUVs.

Additionally, Nio has a solid stake in the Chinese market, a market that counts over one billion people to its credit and gives it an excellent chance of success. Throw in Nio's stake in the electric vehicle market—the most obvious benefit it has—and it's got a very real potential to be a solid performer. Achieving a delivery record recently didn't hurt either.

That's not to say there aren't risks. The very real possibility that Chinese stocks could be de-listed from US exchanges is still there, even if it's not likely to hit immediately, represents one of the biggest such risks. There are also plenty of competitors in the electric vehicle market, including some that aren't exactly the most credible firms around. Throw in the fact that the electric vehicle market is inherently limited due to cold conditions and it's a bit of hit to Nio.

Still, Nio is clearly a leader in the electric vehicle field, and has several positive points to its merit. It's going to be in for a fight, and it may have a boom lowered onto it if the de-listings take place, but it's still proving an attractive buy even at its soon-to-be-diluted levels.