Electric vehicle (EV) maker NIO (NYSE: NIO) has a fan base. It has sold tens of thousands of its vehicles already and generated almost $8bn in revenue last year. Yet NIO stock has been losing fans, with the share price falling 30% since the start of this year.
That puts it within just 4% higher than its price five years ago. Over the same period, shares in rival Tesla have soared 823%.
So is NIO an also-ran doomed to disappoint investors? Or could the recent price fall offer me an opportunity to add the company to my portfolio?
Lots to like
Actually, I think there are quite a few positive elements to the NIO investment case. As those sizeable sales suggest, this is not just some start-up business with a plan to take on Tesla and other vehicle makers.
Rather, it is a rapidly-maturing business that has already proven it has the capability to design, engineer, manufacture and market cars at scale.
That already sets it apart from some would-be competitors whose plans are yet to get off the drawing board.
NIO has some other competitive advantages that appeal to me too. It has invested heavily in a battery-swapping network. That is a simple idea but one that could help remove a key barrier to purchase for EVs, namely battery range.
Far from profit
But although some parts of the NIO story appeal to me, I do have some concerns as well.
Sales are one thing but, ultimately, what a business needs is profitable sales. On that score, NIO does not look so appealing. The company’s net loss ballooned 43% last year, to almost $3bn.
A lot of vehicle companies (including Tesla) have lost lots of money in their early years. Building the supply chain, manufacturing capacity and sales network for such a business does not come cheap.
It does concern me though, that NIO’s business is growing (revenues were up 13% last year) but its net losses are growing faster. That is not a sustainable recipe for long-term success.
Not buying now
It also explains why, although I like the business, I am not tempted to add NIO stock to my portfolio at the current valuation.
The price could yet turn out to be a bargain if NIO can prove its business model and move into the black on a sustainable basis.
But whether it can, or will do, remains to be seen.
The firm faces a variety of risks including competition pushing down profit margins, inflation in manufacturing costs and ongoing cash burn. Those are sizeable risks and help explain the recent fall in NIO stock, in my opinion.
So for now, I will wait and watch. If NIO can prove its business model, I may consider investing. But, for now, it still has a lot of work to do.
