NIO's Secret Weapon Is About to Take On Tesla

If you’ve only glanced at the electric vehicle (EV) industry, you can be forgiven for not knowing about the Onvo brand. You’d likely be even less aware that it’s NIO‘s (NIO 2.72%) attempt to expand into Tesla (TSLA -1.64%) territory to battle its best-selling Model Y. But that’s exactly what the Chinese EV maker is attempting to do with the launch of its Onvo L60.

Let’s see what this could mean for Nio’s stock and whether or not investors should dive in.

On the way

After Nio unveiled its Onvo L60 model in May, production vehicles rolled onto the assembly floor at a company plant earlier this month, and deliveries will begin shortly. It’s a big step for Nio, which hopes the L60 will attack Tesla’s Model Y market share in China. The latter starts at around $34,000, while Nio’s L60 will check in about $4,000 cheaper in China. It’s also possible that with battery leasing, as Nio does with its other models, the L60 could be even more affordable.

In an effort to help push the model to success, Nio is opening over 100 Onvo stores next week which will open the doors of the L60 to the public. The EV maker is hoping the mainstream brand can help steer the company on a better path. Consider that in early 2021, Nio’s market capitalization topped $100 billion, but that’s changed considerably — and after its 60% plunge just this year, the company’s market value sits at roughly $8 billion.

It’s also possible that Nio’s L60 helps continue recent momentum as Nio delivered nearly 20,500 vehicles in July, marking the third-straight month of 20,000-plus deliveries. Its 21,209 deliveries in June were good enough for a monthly record. So far in 2024, Nio has delivered nearly 108,000 vehicles, which was good enough for a 44% increase compared to the prior-year period.

One reason for investor pessimism is simply the current outlook in China. As the country grapples with a property crisis and weak-market optimism, consumers are less likely to opt for Nio’s more expensive luxury vehicles and could lean into Onvo’s more affordable brand.

Is Nio a buy?

Nio is currently still in a growth phase, especially considering it’s branching out from its traditional luxury lineup to the mainstream Onvo brand. However, the growth phase also means supporting a European expansion amid tariffs on imported Chinese EVs, increasing the number of battery-swap stations, as well as developing driverless-vehicle technology.

Those ambitions come at a cost to Nio’s profitability, or lack thereof. In fact, Nio’s first-quarter loss actually widened from the prior year, and gross margin declined from 7.5% in the previous quarter to 4.9%. Analysts do expect a narrowing loss for Q2 at $0.28 per share, compared to the prior year’s $0.51 loss. For investors, it isn’t wise to predict its first profitable year to be before 2027, and patience will be required as the Chinese government tries to stabilize the economy.

Onvo could be Nio’s path to improving those margins even with the vehicles selling at a lower price tag. That’s simply due to higher deliveries driving better absorption of fixed costs. Onvo might even be considered a stepping stone to an even more affordable Nio brand coming, named Firefly, which is aiming for price targets between a staggeringly low $14,000 and $28,000.

Ultimately, Nio looks like a hold right now as the company attempts to improve its margins amid launches of a more affordable brand and a timid Chinese economy. However, the stock could certainly rebound if the company’s revenue soars on increased deliveries and hopefully higher margins, which will be critical for investors to keep an eye on.