Why Cathie Wood Just Dumped Tesla for This Hot EV Stock

Famed investor Cathie Wood is a bull on electric vehicles (EVs), as the industry fits her policy of investing in disruption and innovation growth stories, including autonomous technology. In a recent interview  with Barron's, Wood even predicted EV sales to grow from 4.8 million units in 2021 to 40 million units in 2026.

Wood owns several EV stocks, but the one that's stood out so far is industry leader Tesla (TSLA). Tesla is, in fact, Wood's largest holding — the stock constituted 7.54% across all of Ark Invest's family of exchange-traded funds (ETFs) as of March 28.

Yet, that's after Wood sold nearly 146,000 shares in Tesla on March 25. The last time Wood sold Tesla shares was in January.

What's even more surprising, though, is the EV stock Wood bought same day: Nio (NIO). The Ark Autonomous Technology & Robotics ETF (ARKQ) reported a purchase transaction of 420,057 shares of Nio on March 25.

To be sure, trimming her Tesla position doesn't necessarily mean Wood's conviction on the stock has lessened. Yet the fact that she bought Nio stock for the first time ever deserves a lot more attention from investors as it confirms Wood's conviction in the Chinese EV stock.

Why Nio caught Cathie Wood's attention

Wood's interest in Tesla shouldn't come as a surprise. The company's foothold in the EV industry is hard to match and even catch up with, as Tesla already has nearly a million cars out on the roads and its sales have grown exponentially in recent years.

Tesla deliveries between 2012 and 2021.
Image source: Statista.

Yet competition is heating up, and Wood seemingly doesn't want miss any opportunity EV companies other than Tesla can bring to the table. Nio is, in fact, often called the “Tesla of China” and has even said it aims to sell better products than Tesla but at lower costs.

The fact that Wood bought Nio stock just one day after the company's fourth-quarter and full-year 2021 earnings release suggests something in the report caught Wood's attention. I believe it's the EV maker's growth plans.

Nio's big plans

Nio expects to deliver 25,000-26,000 vehicles in the first quarter. That's roughly flat sequentially at the lower end of the guidance range and reflects the severe supply constraints facing the company.

Yet Nio isn't worried as much yet and has ruled out any plans to raise vehicle prices to pass on higher costs to consumers for now. Tesla, in contrast, recently raised prices of its EVs twice within a matter of days. 

More importantly, despite the challenges, Nio is sticking with its plans to launch three EVs this year. The company is on track so far, having started deliveries of its flagship sedan, the ET7, on March 28. Nio plans to launch its first SUV, the ES7, in the coming weeks and its midsize sedan, the ET5, later in the year.

Nio's revenue should grow as it expands its product portfolio. In 2021, Nio generated $5.6 billion in revenue backed by deliveries of 91,429 vehicles. And Nio has already set foot outside of China and is targeting one of the world's largest EV markets next: Europe. Nio will enter at least four countries in Europe this year.

A bar chart showing global 2020 plug-in electric vehicle sales by region.
Image source: Statista.

In the long term, Nio plans to create a mass-market brand to build affordable EVs ranging between $30,000 to $50,000 per car.

Path to profitability

As a company that has its eyes set set on two of the world's largest EV markets, the growth potential for Nio is huge if can deliver on its plans. Nio also has a solid competitive advantage over its peers that could give it a lead especially during these inflationary times: its battery-as-a-service (BaaS) program.

BaaS offers potential customers the option to save thousands of dollars by buying cars without batteries and instead paying a monthly subscription fee to swap and charge batteries on demand at Nio's swap stations. As of March 20, Nio had 864 battery swap stations and 760 supercharging stations in China, according to new energy vehicle (NEV)-focused website CnEvPost.

Nio's agility was also on full display when it quickly listed its stock in Hong Kong in early March as the threat of having Chinese stocks delisted from the U.S. deepened. 

Most importantly, Nio just said it could break even as early as the fourth quarter of 2023 and deliver its first full year of profit in 2024. 

In an industry where scaling up production profitably is an uphill task, Nio sounds confident about its capabilities. That's what seems to have caught Cathie Wood's attention, and she evidently bought the dip in this hot EV stock.

Originally published on Fool.com

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns and recommends Nio. and Tesla. The Motley Fool has a disclosure policy.