NIO Goes Public, And TSLA Jumps As A Result?

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NIO is one of the electric vehicle (EV) startups we’ve been most eagerly watching over the past couple of years. It has the backing of some solid Chinese billionaires, has presented an attractive vehicle design in the car class that humans now love most, and has ambitious autonomous and connected vehicle plans.

That said, NIO (previously called NextEV) hasn’t been on the scene for very long and clearly doesn’t have the production track record of a Tesla or even a Streetscooter. The company decided a while back that it would hold an initial public offering (IPO) in order to raise the money it needs to jump into production, but the big question has been, how much are investors willing to bet on the company?

The IPO took place today. It turns out there was barely enough investor confidence to hit the bottom end of NIO’s targeted share price, and instead of raising $1.8 billion at the public offering, it raised $1 billion — indicating a company value of $6.4 billion. That’s more than I’ve raised for my fancy electric vehicle ideas, but it demonstrates the differences in track record and investor appeal between a heavily backed, snazzy EV startup with a Chinese advantage ($6.4 billion) and EV startup leader Tesla ($49.6 billion — at the moment).

Frankly, though, aside from being an indication of how much more stable and accomplished investors see Tesla, I think this is an indication again of how undervalued the company is. In 7 years, the company has gone from mass producing no cars to mass producing (and having demand for) approximately 55,000 cars per quarter (220,000 cars per year). That’s a stunning testament not just to its capacity today but also to its flexibility, innovation, and overall ability to get the job done and hit its targets. As an entrepreneur myself and a reporter who has covered hundreds of cleantech startups for nearly a decade, I know all too well how challenging it is to deliver the goods.

Given how much I cover Tesla professionally and the fact that I’m a TSLA shareholder, you’d probably think that I obsessively watch the Tesla share price, but I actually don’t pay too much attention to it and frequently go days without looking at it. However, when the stock price relates to significant cleantech news, I do look at it and try to understand the relationship between the news and the price. Many are presuming there is a link between NIO’s IPO and Tesla’s share price.

I found it interesting — and initially odd  — that some news outlets were linking a weak NIO IPO to a jump in Tesla’s stock price*, but I remained open minded and looked for an explanation. As I tried to understand the investor rationale, I came up with two explanations (if this link is indeed valid).

First of all, if investors have less confidence in NIO than expected and targeted, that might mean less expectation that Tesla will see significant competition from the bottom. Tesla may have more of a moat around its leadership than the market has been presuming.

On the other hand, the successful (even if weak) IPO could be a signal to more members of the market that the EV industry is the auto industry of the future, and since Tesla leads in this fast-growing market of the future, the company should be valued better. Perhaps the NIO IPO brought this core point back to Wall Street a bit.

Getting back to NIO itself, at approximately $6 a share, the share price is quite an affordable, attractive buy if you feel convinced that NIO will follow in Tesla’s footsteps or even perform better in the hot, gigantic Chinese market where the Shanghai automaker is based. Tencent and Baidu, early NIO investors, seem to have their money down on that. Furthermore, it’s clear NIO has growth expectations beyond China. It has been marketing itself heavily in Europe and North America and also has executive ties there.

But I assume the market wants to see a few solid accomplishments from NIO before it jacks up the company’s market cap. Investors want to see if the company can actually get to production of a few thousand vehicles a year, and then tens of thousands a year, and then possibly hundreds of thousands or millions a year. As Tesla has shown us very well, it’s a tremendous tightrope you have to walk to go from scratch to true mass production. Tesla almost toppled over a few times, and even now that Tesla appears to be on solid, attractive, highly competitive ground, there’s so much skepticism (including manufactured skepticism) that Tesla stock is a roller coast that can climb by $100 and then drop by $100 in an extremely short period of time.

So, regarding NIO, we’ll see if it can walk that tightrope up to 200,000–300,000 vehicles a year as well.

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*Note: Aside from the NIO IPO, there was some speculation that Tesla’s stock price jumped due to anticipated good news from a presentation by Martin Viecha, Tesla’s head of investor relations, at Morgan Stanley’s conference in Laguna Beach, California. It could also be related to this news from Baird’s Ben Kallo.