In little over two months, NIO (NYSE: NIO) has seen its share price soar by almost two thirds. That still leaves NIO stock 68% down over the past five years.
Still, the stunning performance of the share over the past few months has caught my eye.
Some promising signs of long-term potential
NIO is smaller than electric vehicle rivals like Tesla and BYD, but it is no minnow.
In the second quarter, it delivered over 72,000 vehicles. That is 26% higher than at the same period last year.
However, vehicle sales revenues in the quarter showed year-on-year growth of just 3%. So, while volumes grew strongly, clearly there is downward pressure on average selling prices. I see that as an ongoing risk for NIO and its competitors too.
NIO remains loss-making. However, it is scaling up and, over time, those economies of scale could potentially allow it to break into the black, as Tesla did after many years of selling electric cars.
The recent launch of two large SUVs (the ONVO L90 and All-New ES8) has excited investors, as it opens up the possibility of expanding NIO’s target market. That helps explain the recent surge in the NIO stock price.
Making hay while the sun shines
NIO has not been standing still when it comes to car launches, clearly. But, nor has it been idling while its share price surges.
Yesterday (10 September), NIO announced a $1bn share issuance to raise more funds, taking advantage of its soaring stock price. That is good news for the company’s liquidity, but it comes at the cost of diluting existing shareholders.
I see a risk of further such dilution in future if the company continues to bleed cash, as it has done consistently throughout its history.
But the cash raise looks like a smart move to me. It gives the company more breathing room as it tries to turn strong sales growth into smaller losses and hopefully profitability.
I’m watching without buying
So far, that has been a bumpy journey. The most recent quarter saw NIO’s net loss shrink by just 1% year on year, despite the strong growth in sales volumes.
But I think the approach makes some sense. By ramping up volumes, NIO is able to spread its fixed costs more broadly.
Over time, hopefully that can allow it to reduce losses. If pricing pressure in the electric vehicle market eases (which it may, as cheap prices hurt all producers’ profitability), then NIO may be able to raise prices to the point where it makes money.
If that happens then I think NIO stock could end up worth a lot more than it is today.
But while I do see a potential pathway to profitability, a lot still has to go right for NIO to get there. For now it continues to lose money hand over fist. There is no guarantee that will change.
As I think the company’s commercial model ultimately remains unproven, for now I will not be investing.
