The NIO (NYSE:NIO) share price had a fairly volatile journey last week. Despite it falling nearly 10% by Thursday, the US stock recovered almost all of this decline on Friday. But what’s causing this rollercoaster-like behaviour? And does this electric vehicle manufacturing company belong in my portfolio?
The fluctuating NIO share price
Recently, there has been a mixed bag of news surrounding NIO, which appears to be causing the volatility in its share price. Vehicle deliveries for the 2021 first quarter did increase by around 420% year-on-year. However, the management team has stated that the ongoing semiconductor shortage is impeding its ability to ramp up production volumes. As such, guidance for total deliveries in the second quarter indicate a figure between 21,000 and 22,000 vehicles.
This is approximately double what was achieved in Q2 of 2020. But on a quarterly basis, it’s a lacklustre growth rate of 5% to 10%. Given that NIO’s share price is being primarily driven by future production expectations, I’m not surprised to see the share price suffer on the news. But on Friday, the stock made a U-turn. So what happened?
The China Passenger Car Association published new data that revealed some troubling signs of vehicle sales for its largest competitor, Tesla. As a result, NIO became the best-selling electric vehicle brand for SUVs in China last month. Across its ES6, EC6, and ES8 models, the firm sold 7,102 vehicles, equating to roughly 23% of Chinese market share. Needless to say, this is an impressive achievement given the unfavourable operating environment. And so, seeing the NIO share price jump back up is not that surprising to me.
The demand for electric vehicles continues to surge as the world reduces its reliance on fossil fuels. In fact, according to a report from Deloitte, electric vehicles sales are estimated to reach 31.1m by 2030. Comparing that to the 3m electric vehicles sold last year, manufacturers like NIO have enormous growth potential. And with China accounting for more than 40% of the market, the firm looks like it’s in a powerful position based on its latest achievements.
However, as promising as NIO’s progress has been, I have some reservations about its share price. Since the start of 2021, the stock is down by around 37.5%. But over the last 12 months, it’s still up by 870%, placing its market capitalisation at $55bn.
By comparison, total revenue for 2020 was around $2.5bn, yielding a high price-to-sales ratio of 22. Analyst forecasts expect sales to increase to $8.6bn this year, making the valuation look more palatable. However, it also implies that the NIO share price is primarily driven by shareholder expectations rather than existing underlying performance. Combining that with the fact that NIO is unprofitable does add a considerable level of risk. At least, I think so.
Some final thoughts
The semiconductor shortage is ultimately a short-term problem. And as demand for electric vehicles continues to rise, I believe that NIO can become a leading manufacturer within Chinese markets. The valuation is by no means cheap. But the growth potential that lies ahead may be worth paying the premium. And so, I would consider adding this business to my portfolio.
Zaven Boyrazian does not own shares in NIO Inc. The Motley Fool UK owns shares of and has recommended NIO Inc. 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.