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Is NIO Stock a Good Long-Term Investment?

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Is NIO stock is a good long-term investment? After a 256 percent rise in the stock price, is there more upside left in NIO stock? There's a difference when it comes to a stock’s long-term investment thesis.  

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NIO’s stock price history

NIO is often referred to as the ‘Tesla of China’ for its disruptive effect in the Chinese automotive market. Amid much fanfare, NIO made its public debut with an IPO on the NYSE in September 2018 at a price of $6.26. The stock price surged immediately after the IPO due to the expectations of huge growth in China —  the world’s largest EV market. However, reality set in and investors realized that the path to profitability for the company is a long one. NIO’s sales declined in 2019 and the stock tanked. In 2019, NIO stock suffered a decline of 37 percent. 

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NIO was fighting for survival

NIO’s results for the second quarter of 2019 were very disappointing and the guidance was even weaker. The company's deliveries took a big hit due to China’s EV subsidy rollback and a large vehicle recall due to battery issues, which hurt the company’s reputation. NIO's cash burn rate exceeded the cash it was generating. Also, the COVID-19 pandemic took a toll on the company’s sales. 

At one point, NIO was fighting for survival and not profitability. In March 2020, NIO mentioned that it had “substantial doubt” about whether it would remain operational in the next 12 months. Until about the end of March, NIO's stock price had declined by 41 percent in 2020. 

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Hefei government provided a lifeline to NIO

When NIO's outlook appeared questionable, things suddenly improved in March 2020. NIO China announced that it reached a definitive agreement with the government of Hefei. The government agreed to provide the company with $7 billion yuan in financing. The amount took care of NIO’s liquidity concerns and ended the bankruptcy fears. 

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NIO’s operational metrics started falling into place

NIO even took off on the operational front. The company reported two consecutive quarters of record sales in May and June. The capital raise, strong deliveries, and analysts' upgrades ignited a rally in NIO stock. The company's first-quarter results were also strong and the guidance was robust. The company guided for positive gross margins in the second quarter and double-digit gross margins by the end of the year. NIO kept its promise by delivering gross margins of 9.7 percent in the second quarter

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NIO versus Tesla

Due to all of these positive catalysts, NIO stock has returned a whopping 337 percent in the last three months. Tesla is also on fire. Tesla stock has surged by 351 percent compared to NIO’s gain of 256 percent year-to-date. 

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Can NIO and Tesla coexist peacefully?

Tesla’s Model 3 is among the top best-selling EVs in China. However, the companies aren't competing in the same price categories yet. Both companies have been defying the overall downturn in new energy vehicle sales in China. Tesla and NIO are also benefiting from the overall enthusiasm for EV stocks in 2020. Due to the positive market sentiment, the success of one stock benefits the other. 

However, that doesn’t mean that Tesla and NIO aren't competitors. When Tesla was setting up its Shanghai Gigafactory in China, NIO stock took a hit. Tesla has a huge brand recall, which is a threat to NIO sales. Currently, both companies are gaining market share in China at the expense of other smaller EV players and gasoline cars.

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Is NIO a good long-term investment?

NIO has been thriving amid the COVID-19 pandemic. So, is NIO stock a good long-term investment? There are a number of catalysts that support the belief that NIO is solid in the long term. After securing enough financing, the fundamentals are in place for NIO where it can reward investors in the long term. China’s push towards EVs has helped NIO and will likely remain a key catalyst for the company. The macroeconomic landscape is also improving in China, which leads to recovering auto and EV sales. 

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NIO’s unique advantages make it a winner in the long run

Also, NIO has unique advantages including battery swap technology, a loyal customer base, and high-quality user experience. These positives and the general shift in the trend towards EVs should boost NIO. The company is a good bet for the long term. However, NIO stock is very volatile and could remain so. The stock is a good pick for investors who can stomach increased volatility.

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