Nio (NYSE:NIO) is a Chinese electric vehicle (EV) company that designs, develops, manufactures, and sells premium EVs. The company was founded in 2014 by William Li, a serial entrepreneur. Nio shares saw a tremendous rally in 2021, but have since slipped heavily. But are the shares now trading at a potential buying level?
What makes them different?
Nio has quickly become one of the leading EV companies in China. The company is expected to deliver 180,000 vehicles in 2023, and has a strong order backlog. Nio’s vehicles are known for their high performance, advanced technology, and luxurious interiors.
Nio has a number of competitive advantages that make it well-positioned for growth. The company has a strong brand, a loyal customer base, and a deep understanding of the Chinese EV market. Nio is also backed by a strong financial team, which has raised over $7bn in funding.
Nio is expanding its product lineup and its global footprint. The company recently launched its third EV, the ET7, a high-performance sedan that competes with the Tesla Model S. Nio is also planning to enter the European market.
Nio is a high-growth company with a lot of potential. The company is well-positioned to capitalise on the growing demand for EVs in China and around the world.
Why might I consider investing?
Growth — the company is growing rapidly. Nio’s earnings are expected to grow by 63% in the next year.
Value — although discounted cash flow calculation suggests the shares may be 51% overvalued at present, the company’s price-to-sales (P/S) ratio of 3.2 times is significantly below competitors Rivian and Lucid Motors, at 6.9 and 20.5 times.
Turning profitable — although currently unprofitable, Nio expects to begin making profit over the next three years.
Cash — Nio has a very strong balance sheet, with over $6.7bn in cash on hand. The company is also backed, and heavily owned by the government of Abu Dhabi.
Founder led — the founder is still the major shareholder, and operates an experienced leadership team.
What are the risks?
With the Nio share price falling to $11.90 from 2021 highs of $61.95, there are some risks to consider.
The Chinese EV market is still in its early stages of development. There is a risk that the market could slow down or even decline.
Nio is facing increasing competition from other EV companies, such as Tesla and Xpeng. There is also competition from traditional automakers, such as Volkswagen and General Motors, now investing heavily in EVs and hybrids.
Shares have been diluted by 7.6% in the last year. This means that investors have lost value in their holdings as the company looked for further investment. This is a major red flag for me. If the company looks to maintain its steep growth by further diluting shares, then the share price is likely to decline.
Am I buying?
The EV sector is undoubtedly an exciting area to be investing, but investors must be cautious. With technology developing so quickly, hype can lead share prices to levels far beyond fair value. This seemed to be the case in 2021 for Nio shares. With shares being diluted, and with the company still not profitable, I will be looking to put my money to work in EV companies with stronger fundamentals.
