NIO (NYSE:NIO) stock was trading for just $4.50 at the end of July. Fast forward three months, shares of this Chinese electric vehicle (EV) business are changing hands for more than $7.
That’s a healthy 59% gain. Therefore, someone who invested £5,000 at the start of the year would now have roughly £7,950. Nice.
However, longer-term performance has been very disappointing. In fact, five grand invested in NIO at the start of 2022 would now be worth just £1,200 (excluding currency moves).
NIO is heavily loss-making, so has never paid shareholders a dividend.
Red ink
The reason for the stock’s decline essentially boils down to this lack of profitability. Unlike global EV leaders Tesla and BYD, the company has incinerated cash for years.
In 2024, it reported a net loss of about $3.07bn. Losses are expected to narrow both this year and next, but this issue is a concerning one.
So, why has the stock jumped recently? Well, the stock market is quite frothy right now, with lots of speculation being seen. NIO has probably benefitted somewhat from this environment.
However, it would be unfair not to mention the company’s accelerating revenue, driven by new vehicle releases. This includes its Onvo L90 (a massive three-row SUV), which is expected to drive sales growth. So this is undoubtedly a positive for shareholders.
Meanwhile, the stock’s price-to-sales (P/S) ratio is 1.7. This is a lot lower than Tesla (16.5). And with analysts seeing revenue growth of 36%-40% for both this year and next, NIO’s P/S multiple does look cheap.
A trio of negatives
However, three things put me off investing. As mentioned, there’s the ongoing losses. NIO’s management team has long been promising that various partnerships and cost-cutting measures would change the picture, yet the red ink just keeps spilling year after year.
Second, the firm has gone all-in on battery-swap technology. Its ‘Battery-as-a-Service’ offering lets customers buy the car without the battery, lowering the upfront cost. Not only does this help boost sales, it also adds recurring subscription revenue, which I find attractive from an investing perspective.
On the other hand, I also see these battery-swap stations as a burden. They cost a lot to build and maintain (not great for margins). Moreover, as battery technology improves (both in range and charging time), these stations might become obsolete.
It’s worth mentioning that Tesla originally experimented with a battery-swap station, but eventually abandoned the idea to focus on its Supercharger network.
Third, the global EV market is incredibly competitive nowadays. Dozens of new models are being released every year, with the Chinese market increasingly cut-throat. Again, I fail to see how this is good for building and maintaining profit margins.
My move
Summing up, NIO has a good brand in its domestic Chinese market, with growing sales and a nice range of vehicles. It’s founder-led and not afraid to try innovative things to differentiate itself in a crowded market.
However, it’s still uncertain whether it will ever grow into a global EV powerhouse like Tesla and BYD. With ongoing losses and a potentially burdensome battery-swap model, which it can’t just abandon at the drop of the hat, I’m not bullish long term.
In my opinion, there are better and less risky growth stocks to consider right now.
