What happened
Shares of Chinese electric-vehicle (EV) maker Nio (NIO 2.15%) took a turn for the worse Thursday morning, falling 2.3% in the first five minutes after the market opened.
But then, all of a sudden, Nio turned around and started heading higher. As of 10:15 a.m. ET Thursday, the stock is in fact up 4%! Why is that?
A car emerges from Nio's Power Swap battery-swapping station. Image source: Nio.
So what
Some context is in order: Yesterday, Nio announced that with China finally easing restrictions on movement to contain the coronavirus, its deliveries perked up in May after an earlier slump. It delivered 7,024 EVs last month, up 38% from April and up 5% year over year.
That report was good for about a 1% bump in share price yesterday. But today, GLJ Research analyst Gordon Johnson warned that the good news might not last.
The 7,000-plus cars sold in a month is better than Nio's performance a year ago, and better than April, but it doesn't hold a candle to what Tesla (TSLA 1.97%) is capable of producing at its Shanghai Gigafactory: as many as 2,600 cars a day at peak capacity.
More worrisome for GLJ Research, though, is Nio's business model of offering battery swap subscriptions to its customers for a discount on the purchase price in lieu of selling cars with permanent batteries included. Under this plan, a customer buys a Nio electric car sans battery, and instead leases the battery -- with the right to swap out a depleted battery for a fresh one -- for $140 per month. Ordinarily, customers are permitted to swap their batteries only two times a month, but according to GLJ, "a number of customers" have been given the right to swap out batteries an "unlimited" number of times, reports reports The Fly, and without being charged extra for the value of the electricity in the batteries that are swapped in.
That electricity isn't free to Nio, though, and promising to give it away for free, the analyst worries, is likely to keep Nio stock mired in "deep losses every year for a long time." For this reason, GLJ is initiating coverage of Nio as its "new short idea."
Now what
I disagree with that argument, and judging from today's stock price leap, I'm not alone. Far from a liability, Nio's business model of building EVs with swappable batteries is novel, a brilliant solution to the problem of range anxiety with EVs, and even a competitive advantage as Nio takes on Tesla in global markets.
Historically, the biggest turnoff to would-be buyers of EVs has been the worry that they'll run out of juice, and rather than pull into a gas station and fill up in a few minutes, they'll be forced to find an outlet and plug in for an hour or more. Nio's solution to this problem, though, is elegantly simple: Don't recharge your batteries; just swap them out for a fully charged set in three minutes!
Granted, GLJ could be correct that Nio should charge more for this service, but that can be fixed by the addition of a fee covering the cost of the electricity in the new battery. And if Nio is still locked into a contract to provide free electricity to the cars it's already sold, well, it has sold fewer than 200,000 total to date. If it starts charging for electricity now, and later sells cars in the millions or tens of millions over time, those first 200,000 EVs will turn into little more than loss leaders and a rounding error.
Contrary to GLJ's contention, they won't prevent Nio from earning a profit in the future. Indeed, according to analysts polled by S&P Global Market Intelligence, Nio is likely to report its first pro forma profit as early as next year, and turn profitable under generally accepted accounting principles (GAAP) in 2024. That's not a good reason to short Nio stock. It might even be a good reason for the stock to go up.
