From January through to early August, NIO (NYSE: NIO) shares were doing just fine. More than fine, in fact. They were up around 60% for the year, reaching over $15 a share by the start of August.
Now however, just a few weeks later, they’re down at $8.45.
What on earth has triggered this colossal sell-off? And how much would I have today if I’d invested £5k in shares of the Chinese electric vehicle (EV) maker at the start of 2023? Let’s find out.
A disappointing year, so far
Year-to-date, NIO shares are down about 13%. That means, excluding currency effects, my initial £5,000 stake would now be worth approximately £4,350.
That’s not great, but neither is it disastrous, I feel. As mentioned, the stock was at $15 only last month. And one year ago, it was trading for a little over $18. If I’d bought near those prices, I’d be suffering paper losses of around 45-60%.
That would be far worse, as when I lose 50% of my money on a stock, I have to make 100% to get it back. And it’s rare that a stock doubles in a short space of time. It could take years to get back to the price I paid, if ever.
Another negative is that NIO is a loss-making business, so doesn’t pay dividends.
Why did the stock plunge recently?
Firstly, China’s economy has encountered difficulties recently, including slowing growth and exports, record youth unemployment, and an ongoing property crisis. This has dented investor sentiment around Chinese stocks.
Then on 29 August, NIO released its second-quarter earnings. It reported that vehicle deliveries fell 6% year on year to 23,520. And total revenue dropped 15% to $1.21bn, while its adjusted net loss ballooned to $751m.
Worryingly, its quarterly vehicle margin plunged to 6.2% from 16.7% in the second quarter of 2022.
Following this, NIO announced that it’s planning to offer $500m worth of convertible senior notes due 2029 and a further $500m due 2030. These are debt instruments that can be converted into stock, which could lead to shareholder dilution. Essentially, NIO is taking on $1bn in debt to fund itself.
Finally, the European Commission has launched an anti-subsidy investigation into Chinese-made EVs. The EU is a market where NIO has a growing presence, so this probe muddies the waters regarding its international prospects.
My move now
If the EV firm can ever translate its promise into profits, I think the stock could get back on track. But that’s looking as uncertain as ever today. And analysts aren’t expecting the business to become profitable for a few more years yet.
Meanwhile, its margins are being ravaged by inflationary pressures and an EV price war in China.
Now, I note that NIO shares are still a relatively large holding in the portfolio of Scottish Mortgage Investment Trust. That suggests the fund managers continue to rate the company’s long-term prospects.
The trust is one of my own largest holdings, so I have some exposure to NIO through that investment. But there’s too much uncertainty around the company’s path to profitability right now for me to invest directly in the stock.
Overall, I think there are better growth opportunities elsewhere, especially on the UK’s mid-cap FTSE 250.
