Electric vehicle stock NIO (NYSE: NIO) has had a tough start to 2024. At the time of writing, the shares have fallen over 30%, currently hovering around the $6 mark.
It was not so long ago that NIO stock was priced over $60, after riding the tech growth stock wave of late 2021. So, with the shares now trading at a tenth of that value, am I stupid not to be buying in? Let’s take a closer look.
What I like about NIO
For me, one of NIO’s draws has always been its high growth. In its last full-year results, the company delivered revenues of $6.5bn, a 37% year-on-year increase.
More recently, for Q3 2023, NIO’s sales topped $2.3bn, a 46% year-on-year increase and a whopping 142% surge from the previous quarter. If NIO can keep delivering this kind of top-line growth, I am confident that investors will start to recognise its potential.
It should be noted that NIO is not yet profitable. However, its net profit margin expanded by 24% year on year for Q3, highlighting the move closer to profitability. The ‘scale to profit’ strategy employed by NIO is not new. It was leveraged by Tesla for years before it turned profitable in 2020. Essentially, the company uses debt to accelerate its expansion, and once it achieves profitability, the returns are big.
What continues to worry me
NIO is a fast grower. However, there are still a number of warning signs that worry me.
Firstly, NIO is a Chinese-based company. China’s economic performance has come under scrutiny over the last year, with many analysts downgrading its performance. A key indicator of this was two of China’s largest property developers defaulting on bond payments in late 2023. Put more simply, China’s rapid economic expansion is set to slow, and this could restrict NIO’s domestic demand.
On the other side of the pond, tension remains high between China and the US. Issues over trade persist, and with Trump leading election polls, the US could take a harder-line stance on China in the future. This could damage NIO’s ability to expand into America, a key electric vehicle (EV) market.
Finally, global interest rates have substantially climbed over the last 12 months. NIO has over $4bn in debt on its balance sheet. With rates expected to remain high for the majority of 2024, the EV manufacturer will have to shell out millions of dollars in interest payments – a problem that it did not have in the low-rate environment of the last decade. This could place additional pressure on NIO’s path to profitability.
A buy at $6?
NIO stock does look cheap. It’s also growing at an encouraging rate. However, for me, there are too many obstacles ahead, even at $6. Even though the stock has fallen 30% this year, it doesn’t mean that it won’t fall another 30%! For that reason, I won’t be buying today.
