Is It Finally Time to Back Up the Armored Truck to Buy Nio Stock?

There's a harsh reality setting in for global automakers that have dipped their toes, or gone all-in, into the electric vehicle (EV) industry. That reality is that Chinese EV makers are quite far advanced in EV technology and supply chains, all while severely undercutting global pricing. Roughly half of China's new-vehicle market is already generated by EVs, far ahead of the global market share, and the brands are rapidly exporting and expanding around the globe.

Nio (NYSE: NIO) is a premium Chinese EV manufacturer that has expanded its number of brands quickly, but it also has one massive uncertainty for potential investors: its battery swap network.

Uncertainty remains

It's easy to understand why investors are intrigued by Nio. When considering EV investments broadly, investors might be quick to jump toward leading Chinese automakers such as BYD, which has overtaken Tesla in global sales, or Nio, which has positioned itself in the premium market and then branched out to more affordable models to boost sales volume.

Nio's newer brands, Onvo and Firefly, have gained traction in the market and driven sales momentum. Nio delivered more than 48,000 vehicles in December, good for a nearly 55% increase compared to the prior year, and it posted a 71.7% gain during the fourth quarter.

Before investors prepare to back up the armored truck and load up on Nio shares, there is an elephant in the room to discuss. That elephant is none other than Nio's battery swapping network. Nio has developed its own network of battery swap stations that offer full battery swaps. This essentially offers refueling speeds similar to a five-minute gasoline fill-up. In addition to battery swapping speed, the battery-as-a-service (BaaS) model enables buyers to purchase the car without large upfront battery costs, which can make premium EV pricing more affordable.

Image source: Nio.

The problem for investors is twofold: uncertainty and scale. There's no certainty that BaaS will be the dominant way that drivers in China, or around the globe, effectively refuel. Investors don't know if fast charging options will continue to improve to the point where battery swapping is an unnecessary luxury, or if EV markets can support two different models for different consumers.

The other problem is simply scale. Because Nio's fleet of vehicles on the road is relatively small, and the BaaS is only an option, the volume of battery swaps at its stations is low in many locations, which pushes profitability further out. On top of that, the upfront costs for these battery swap stations are significant. It could be argued that the capital would be better spent toward expanding Nio's brands or entering new markets.

Time to buy?

If there's one word Wall Street hates, it's the word "uncertainty." That's what Nio has in heaps with its BaaS swapping network, and it brings investors more questions than answers right now. Along with massive upfront costs, low utilization that hurts margins, and complications with resale due to battery lease, there's the constant updating and upgrading of fast-charging infrastructure and technology that threaten to make BaaS less relevant.

Nio is an attractive investment for many reasons, but its uncertain battery swapping network makes it too risky for many investors right now.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.