Over the past five years, carmaker NIO (NYSE: NIO) has seen sales surge. First-quarter revenues were down 39% compared to the fourth quarter of last year – but they were up 877% over five years. At around £1.2bn for the three months in question, they are substantial.
Yet, despite surging sales revenues, NIO stock has fallen 50% in five years.
Could that offer me an interesting investment opportunity? After all, even if the share price just gets back to where it stood five years ago, that would mean doubling money put in today.
Share price fall has happened with reason
The idea of a share price “just getting back” to where it used to be can be appealing but has no real basis in logic. I would like my looks to get back to where they were five years ago – but that does not mean it will happen.
Instead, the question I need to ask as an investor is what I think a reasonable price for NIO stock would be and whether I see drivers that could help push it there.
Here, things become problematic for the current NIO investment case as I see it.
Sure, sales volumes and revenues have surged. So what accountants call the ‘top line‘ (revenues) is doing well.
The problem is all the costs that sit between that and the ‘bottom line’. In NIO’s case, the bottom line is not a profit, but a loss. At close to £700m in the most recent quarter alone, it is substantial.
This is the key challenge I see with NIO. It has been consistently loss-making and burnt through lots of cash. It ended the quarter with around £2.6bn of cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits. But if it keeps burning cash like it has been, I do not see that lasting much more than a couple of years at most.
A fork in the road?
NIO could try to raise more cash, at the risk of diluting existing shareholders. My bigger concern as a potential investor is not about the cash burn so much as the business model.
Rival Tesla bled cash for years before it became profitable. Making cars is an expensive business with high fixed costs. But, with even Tesla now seeing car sales volumes falling, it is clear that the electric vehicle market is highly competitive. That could be bad news for smaller players, including Nio.
The company has pinned a lot on its battery-swapping technology, explaining some of its cash burn. But the potential for significantly longer battery ranges could leave that competitive advantage dead in the water.
NIO would then need to rely more on its brand, design, and other features that help set it apart from rivals. Again, though, it is not the only carmaker trying to do that.
With a business model that has yet to prove profitable, cash pouring out the door, and a brutally competitive outlook for the electric vehicle market even before considering any future tariff changes, the risks here are too high for me.
If things go well and NIO proves its business model, the stock may well double in future. But I would want to see much more evidence of progress in that direction before I would even consider investing.
