NIO (NYSE:NIO) shares slumped on Wednesday on the back of news that Tesla would be cutting prices again. At one point during the day, the stock was down nearly 9%.
As a side note, I’m always surprised by the volatility of the stock. Wednesday’s slump is a perfect example. It lost nearly 10% of its value after Tesla — a less premium brand — dropped its prices.
But this brings me to a bigger question. The carmaker is currently trading below $9. So is buying NIO stock now the same as buying Tesla a decade ago, when its shares were worth just $3?
The growth curve
NIO’s growth curve doesn’t look as exciting today as it did a year ago. For a period it looked as if revenue was doubling every year. But in 2022, with China’s Covid-19 lockdowns, growth slowed.
But as we can see from the below data, revenue growth is still impressive.
| Year | 2018 | 2019 | 2020 | 2021 | 2022 |
| Revenue ($m) | 719.8 | 1,123.8 | 2,490.6 | 5,686.3 | 7,143.5 |
But there’s certainly hope that it might get back on track in 2023. CFO Steven Feng recently said the company is “very confident” of meeting its target of doubling sales to 250,000 electric vehicles (EVs) this year.
It delivered 122,486 cars in 2022, up 34% from a year earlier, but still short of the company’s original target. It’s also worth noting that margins suffered in 2022 as the company introduced discounts to move older stock.
So if Feng is right, 2023 could be a great year for the firm? Maybe we will see revenue double again.
Margins
NIO frightened some investors with its Q4 results. Gross margins fell from 17.2% a year ago to just 3.9%. Vehicle margins were down at 6.8%.
It blamed the fall in margins on “inventory provisions, accelerated depreciation on production facilities, and losses on purchase commitments for the existing generation of ES8, ES6, and EC6”.
Some of these words, like “accelerated depreciation“, might sound a little concerning. But it’s not what investors might think.
NIO is transitioning all of its models to the second-generation platform. Customers responded by cancelling orders for older models and purchasing cars on the second-generation platform.
That left it with an inventory of older models to clear. In turn, the company offered incentives to sell them, causing downward pressure on margins.
By comparison, Tesla’s margins are much stronger. The firm’s Q1 gross margin is expected to decline to 23% — after pricing cuts — from 25.9% in Q4.
However, with older stock cleared and production ramping up, I’d expect to see NIO’s margins improve significantly.
A new Tesla?
This isn’t a new Tesla, but I think the stock offers a similar exponential growth potential.
NIO’s swappable battery tech and its battery-as-a-service (BaaS) programme help differentiate it from competitors, while lowering upfront costs. Its battery swap stations also represent another revenue-generating opportunity.
And then we can look at the growth of EV sales in China. NIO may struggle to gain access to the EU and US market in the same way Tesla has, but China accounted for more than half of all EV sales last year – 6m. That figure is projected to reach 15m by 2030 — NIO will have a big slice of this very big pie.
It needs to get its margins back on track — I’ll be keeping a close eye on this. But it’s not enough to put me off. I’ve recently bought more shares.
