Warren Buffett has a history of investing in high-quality growth stocks. Whenever he evaluates an investment, he is looking for a company with a standout competitive advantage and a long runway for growth ahead. NIO (NYSE: NIO) shares exhibit these qualities.
Warren Buffett qualities
I do not think it is too outlandish to suggest Buffett could acquire a stake in the Chinese electric vehicle (EV) manufacturer. Indeed, he already owns a position in BYD, another Chinese enterprise that manufactures EVs. The company’s badge is emblazoned on double-decker buses in London.
When Buffett bought his position in the stock, he said he was impressed by the company’s innovative nature. NIO is also trying to innovate in the EV space. The corporation has pioneered an interchangeable battery pack system. This allows users to swap out drained batteries for new ones at specific locations. Rather than waiting for batteries to charge, consumers can carry on with their journey.
Buffett was also attracted to BYD for the corporation’s growth prospects. I think NIO’s growth potential is similar, if not greater, than that of its peer.
The company is currently producing around 300,000 units per year. Meanwhile, the Chinese EV market may grow at an annual rate of 31% until 2026. It was worth $98bn in 2019. I see no reason why the enterprise cannot grow at a similar, or faster, rate than the rest of the market in the years ahead as production capacity grows, along with consumer awareness of the brand.
These are the reasons why I think Buffett might buy the shares. However, there is also a selection of reasons why he might avoid the stock.
The risks of NIO shares
The company’s public listing depends on the Variable Interest Entity (VIE) structure, a grey legal area. It is neither legal or illegal under Chinese law. This adds an element of risk into the equation with NIO shares.
Further, the global EV market is highly competitive and is only becoming more so as the sector expands. Therefore, while it is clear that the firm does have potential, it could face a significant challenge to outmanoeuvre the competition in the years ahead.
Buffett may also hesitate to initiate a position in a group that is a direct competitor of an existing holding. He usually picks his favourite company in a sector and sticks with it rather than spreading assets across different businesses. This is not guaranteed, but it is something to consider.
All in all, while I think NIO shares do have potential, I reckon they might be a bit too adventurous for Buffett. They are also a bit too adventurous for my portfolio. Considering the risks outlined above, I would rather own a more established company with a more prominent global footprint and established production base.
