NIO stock: a rare chance to get rich?

NIO stock has had a calamitous fall since reaching astronomic highs during the pandemic. Could investing in this beaten-down growth share make me rich?

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NIO (NYSE:NIO) stock has attracted significant investor interest in recent years. The Chinese electric vehicle (EV) manufacturer has been touted as a rival to Tesla, and the company isn’t short of ambition, with overseas expansion underway in several European markets.

However, the NIO share price is down 52% over the past year. So, could this be a rare chance for me to invest in a cheap stock with a view to securing big returns, or is it a value trap?

Here’s my take.

Growth potential

China is the world’s largest EV market. The growth trajectory of unit sales in the country is impressive, according to figures produced by the China Passenger Car Association (CPCA).

YearEV sales in China
20212.99m
20226.4m
20238.4m (forecast)

NIO stands to benefit from strong brand recognition in a growing market, but it’s a competitive arena. The carmaker has plenty of domestic challengers, including XPeng, Li Auto, and Warren Buffett-backed BYD. There’s also foreign competition from Tesla, which relies on China for around 40% of its sales.

Despite the crowded field, there are some positive signs for NIO in its quest for market share. Vehicle deliveries reached 122,486 in 2022. That’s a 34% increase from 2021, and Q4 deliveries were particularly encouraging at 40,052.

In addition, the company is making progress in Europe. On the back of its entry into the Norwegian market in 2021, the business now sells its ET7 flagship sedan model in Germany, the Netherlands, Denmark, and Sweden. At present, the firm has access to 380,000 charging points across the continent.

Risks

Despite a growing domestic market, there are worries that EV sales in China could slow. Beijing is phasing out cash subsidies for EV purchases in an end to a 12-year policy programme of incentives. This could curb consumer demand and limit growth prospects for the NIO share price.

That’s not all. There are further reasons I’m worried about the company. The vehicle margin slumped to just 6.8% in Q4, down 14.1% year on year. NIO cited inventory provisions, accelerated depreciation on production facilities, and losses on purchase commitments for its generation of ES8, ES6, and EC6 models as reasons for the decline.

Perhaps my biggest concern is NIO’s net loss for the last financial year, which totalled $2.1bn — that’s nearly 260% more than in 2021. This can be partially credited to global expansion and increased expenditure (for instance, R&D expenses increased 117.7%), but it looks like NIO is spending more than it can afford in my view.

Could NIO stock make me rich?

The NIO share price might look more attractively valued than it did a year ago, but I’m still not tempted to invest. Widening losses and contracting margins are a vicious combination, and that’s before I even consider the competitive fight the firm faces for market share.

I could be wrong, and the stock may stage a comeback if its expansion plans prove successful. But currently, I don’t believe NIO shares are my ticket to golden riches. There are plenty of other investment opportunities in the stock market that I prefer right now, so I’m looking elsewhere as things stand.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has no positions in any of the companies mentioned. The Motley Fool UK has recommended Tesla. 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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