Whenever I have covered NIO (NYSE: NIO) stock in the past, I have always tried to clarify that the main reason I am not buying the shares today is the company’s second-place position in the electric vehicle (EV) market.
While I am excited by its battery technology, which allows consumers to swap out old batteries for new to speed up charging, it still has a lot of work to do to capture a big share of the market. Its US competitor, Tesla, is already producing 10 times more vehicles a quarter.
NIO is trying to rapidly increase output in order to meet the growing demand for EVs. But so are its competitors.
The outlook for NIO stock
The competitive environment in the EV space is only becoming tougher. Without the first-mover advantage that Tesla has been able to build, NIO may continue to struggle.
There are other reasons why I am avoiding NIO stock. The Chinese company went public through what is known as the variable interest entity (VIE) structure. Under the structure, shareholders do not actually own an interest in the underlying business. They own an interest in an offshore entity, which has rights to the underlying corporation.
Not only is this structure opaque, but it also has not been given the green light by Chinese regulators. They have not declared it illegal, but they have not made it legal either. It operates in a grey area.
Of course, regulators may never decide to take action against this structure. By raising money in New York, Chinese companies using VIE have been able to bring hundreds of billions of dollars in outside capital into China. I do not think regulators will want to cut off this supply of funding.
Nevertheless, I am not comfortable bringing this sort of exposure into my portfolio. Moreover, when coupled with the competitive challenges I have outlined above, NIO stock is just far too risky for me. This is why I think it is improbable I will ever buy a position in the stock for my portfolio.
That said, I could always change my mind.
As I noted above, the company has some exciting tech, which could help it capture a large share of the EV market around the world. If it can ramp up production to meet demand, it could even gain an edge over Tesla.
NIO’s main advantage is that, as a Chinese corporation, it has significant exposure to this market. The Chinese automotive market is the largest in the world. Success is virtually guaranteed if a company can make it in this market.
So if NIO can overtake Tesla as the world’s leading pure-play EV producer, I would be happy to reconsider my position on the stock. In the meantime, I am going to continue to avoid the company.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.