Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential — but will he invest?

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Back view of blue NIO EP9 electric vehicle

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This year has begun poorly for shareholders in electric vehicle maker NIO (NYSE: NIO). NIO stock has tumbled 31% since the start of last month. Over five years, it is down 42%.

But, with a market capitalisation of $12bn even after the fall, NIO is still a sizeable stock market presence. So, should I take advantage of the much lower price to buy some shares for my portfolio?

Can NIO thrive?

The first question I ask as an investor when considering the possible merits of a share is what I think the long-term prospects of the business are.

That is not the only thing that matters: valuation is important too. But unless the business looks like it is going somewhere good, I will not even bother considering its valuation.

The electric vehicle market is already large and I expect it to grow substantially in coming years. That offers an opportunity for NIO although it also means that it is fighting for market share with a host of competitors such as Tesla. That risks cutting profit margins, something that has already been weighing on earnings at Tesla.

NIO has some advantages: its premium branding is one and so too is its battery swapping technology. In fact, I think that helps it overcome a barrier some drivers have when it comes to purchasing an electric vehicle: journey range.

In its most recently reported quarter, NIO deliveries surged 75% compared to the prior year quarter, topping 55,000.

It has the makings of a substantial business when it comes to revenues. But what about earnings?

Profitability concerns

The earnings outlook is where questions about the business model really kick in, something I think helps explain the downwards momentum of the NIO stock price recently.

Last year the business lost $2.1bn. That was not its worst ever performance – it lost $3.4bn in 2018, for example – but it is a substantially poorer bottom line than the prior year. The serially loss-making company continues to spill red ink. For six years in a row, it has lost at least $700m annually.

For now I do not have liquidity concerns. NIO had around $6.2bn of cash and cash equivalents at the end of September. That is ample for now, although I see a risk that at some point the company will dilute existing shareholders to shore up its balance sheet.

What does concern me as a potential investor is: where (if anywhere) will the red ink end?

Looking for more signs of money-making potential

Tesla lost billions of dollars before moving into the black.

Car assembly is a highly expensive business to get into and NIO remains at the stage where it is making investments to ramp up the business.

But its business model has not yet proven that it can be profitable. The electric vehicle industry is more and more crowded, putting pressure on selling prices – and profit margins.

If that continues, which I think it will, NIO could get further not closer to profitability. That has been the case in the past couple of years.

If the company moves towards profitability, I think the current NIO stock price could yet seem like a bargain. But, for now, I would like to see more evidence of a proven, profitable business model before I consider investing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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