Investing in electric vehicle manufacturers is not for widows and orphans. The sector sees some fairly dramatic price swings. Take NIO (NYSE: NIO) stock as an example, which has almost halved since August.
It is still higher than it was five years ago, though only by 10%. That pales compared to rival Tesla, whose stock has increased over tenfold in that period.
Still, could the recent price crash present me with a good buying opportunity to add NIO to my portfolio?
Some reasons to buy NIO
First let me explain why I might want to own NIO in the first place.
Demand for electric vehicles is set to grow strongly for years to come. Just as with the traditional car industry, I think multiple players could succeed at the same time.
Although its cars may not be the common sight on our roads that Tesla’s now are, NIO is a fully functioning company with proven manufacturing and sales capability. In its most recent quarter, the business delivered over 23,000 vehicles.
That was actually a slight drop from the comparable three months the prior year. But it came after a couple of strong quarters. NIO delivered over 40,000 vehicles in the final quarter of last year, for example.
I like NIO’s premium positioning as it can help set the marque apart and give the business pricing power.
I also think it has a competitive advantage thanks to proprietary technology like its battery-swapping system. That helps drivers overcome one of the headaches associated with many rivals’ vehicles: the need to find and use charging stations.
Are the shares good value?
But, although I am upbeat about parts of the story, that does not necessarily make me want to own NIO stock at this point in the company’s development. There are a few things that concern me.
Falling sales in the most recent quarter were disappointing but may be a blip. Lower profit margins, though, reflect increasingly tough competition among electric vehicle rivals that may well be here to stay. That has also hurt Tesla’s margins. NIO is already lossmaking, so margins falling is bad news for the economics of the business.
The losses also concern me. Yes, this is an industry with massive start-up and capital expenditure costs before a single vehicle rolls off the production line. But NIO consistently remains heavily in the red. Its net loss in the recent quarter alone more than doubled year on year, to around $835m. That is equivalent to almost 70% of revenues in the period.
I think the recent business performance helps explain why NIO shares have dived in the past few months.
I reckon that, if the business returns to revenue growth, trims its losses sharply and proves its business model more fully, the current share price could yet turn out to be a massive bargain.
But those are big challenges.
For me to consider investing, I would want to see the business turn a net profit (not just an operating profit) and prove that it can do so consistently.
It does not look anywhere near that now. So, although it could soar again in future, for now at least I have no plans to purchase NIO stock.