Down 31% since January, is NIO stock a bargain?

Christopher Ruane weighs some pros and cons of buying NIO stock for his portfolio at the moment, after its poor start to 2024 brought the price far down.

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With a $12bn market capitalisation and thousands of new cars rolling off its production lines each month, NIO (NYSE: NIO) is an established business with a sizeable stock market price tag. Yet NIO stock has slumped 31% since the start of the year — just over a couple of months ago.

There are some potentially good reasons for this fall, which I will discuss below. But could the share price tumble offer me a potential bargain?

Widespread woes

NIO stock is not the only electric vehicle producer to have had a rough start to 2024.

Tesla stock has soared over ninefold in five years, but it is down 28% so far in 2024. Rivian has done even worse, losing 40% so far this year – and 90% over the past five years.

Clearly, then, the stock market seems to be souring on electric vehicle makers generally, not only NIO. As more producers have entered the market, there has been pressure on margins.

NIO’s delivery volumes in its most recent quarter actually declined from the prior quarter, although they still showed year-on-year growth of 5%.

What about pricing pressure?

Gross margin in the quarter was 7.5%. However, I do not attach much weight to that figure when it comes to valuing NIO stock.

The business remains heavily loss-making – to the tune of $2.9bn last year – so what I am more interested in is the long-term outlook for net margin. In other words, how much money (if any) can NIO make each year after paying all its costs?

Potential for a brilliant business

So far, it is hard to tell.

I expect a shakeout of the electric vehicle market, with some smaller producers folding while a round of industry consolidation at some point brings real economies of scale.

Could NIO do well? I do think it has a few things going in its favour. Its innovative system of swappable batteries is a practical solution to the real problem of limited battery life and inadequate charging infrastructure in many places.

The company has established a premium brand that could help it carve out a niche in the market.

In its annual results published this week, NIO’s chief executive said, “Our continuous investments in technologies, battery swapping network and user community will bolster our competitive advantages as we navigate the future competition”. I think he is right.

Getting the numbers right

What that does not necessarily mean, though, is that NIO could become a sustainably profitable business.

For me to consider buying NIO stock, I would like to be convinced that it has a proven business model that can make profits on an ongoing basis.

Without that, I cannot value NIO stock, so am unable to judge whether it is a bargain after its recent price reduction.

So I will continue to watch the business performance. Specifically, I will be keen to see whether it has a clear pathway to profitability I think can last.

For now, though, I will not be 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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