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Are NIO shares my best bet in the electric vehicle market?

Back view of blue NIO EP9 electric vehicle
Image source: Sam Robson, The Motley Fool UK

Electric vehicle (EV) stocks are popular at the moment. I wrote last week about the recent Rivian IPO, and how I’d buy shares in the company instead of Tesla. NIO (NYSE:NIO) is another potential option I have for investing in the sector at the moment. So should I allocate some of my money to the Chinese car manufacturer and buy NIO shares?

Growth in production

NIO was formed back in 2014, so it’s still a relatively young company. It’s grown in size quickly, going public back in late 2018. The latest quarterly figures show that production levels are still scaling up.

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For example, in Q3 of this year NIO delivered 24,439 vehicles. This was up 11.6% on Q2, but more impressively was up over 100% on the same quarter last year. The margin being made on the vehicles for the quarter was 18%, which was down slightly on Q2 but up versus last year. 

The delivery and margin figures are a tick in the box for a potential investor. In the electric vehicle market, some players are yet to get up to speed on production and sales — one statement I saw recently when commenting on Rivian is that it’s the biggest company in the US with no revenue!

As a traditional investor, buying a company with a track record of production would be more appealing to me than one with large unknowns.

Risks with continued losses

But one reason why I might want to steer clear of NIO shares is the losses being made. For 2020, the loss attributable to shareholders was $859.9m. Even in the latest quarterly results, the loss was $443.7m just for Q3. I do note that this was related to some one-off purchases, but even without these, it still would have posted a hefty loss.

The issue here is whether or not I feel comfortable buying NIO shares in the knowledge that it might take a long time before the company makes a profit. In fact, the risk is that the company might never become profitable. It might need to reach an unrealistic production level of vehicles to make money.

The role model of a firm that can find profitability in this market is often seen as Tesla. It lost money for years before becoming profitable. I think NIO could also break even over time. The huge market potential in China alone should enable demand to keep coming. 

Putting NIO shares to one side

NIO shares are down 26% over the past year. When I compare this to the fact that Tesla shares have doubled in the same period, there are alarm bells ringing. The excitement and share price rally in Rivian in the first few days after its IPO show that investors are wanting a piece of the pie. But with NIO shares not moving higher, maybe there are better stocks to buy in this sector.

Although I do think that NIO has a bright future, I don’t think it’s the best bet for me in this sector right now. Even though the production levels are strong, I think there’s more opportunity to generate profits from other peers such as Rivian.

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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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