Picture supply: Sam Robson, The Motley Idiot UK
This yr has begun poorly for shareholders in electrical car maker NIO (NYSE: NIO). NIO inventory has tumbled 31% because the begin of final month. Over 5 years, it’s down 42%.
However, with a market capitalisation of $12bn even after the autumn, NIO remains to be a sizeable inventory market presence. So, ought to I make the most of the a lot cheaper price to purchase some shares for my portfolio?
Can NIO thrive?
The primary query I ask as an investor when contemplating the doable deserves of a share is what I believe the long-term prospects of the enterprise are.
That isn’t the one factor that issues: valuation is necessary too. However until the enterprise appears to be like like it’s going someplace good, I can’t even trouble contemplating its valuation.
The electrical car market is already giant and I anticipate it to develop considerably in coming years. That provides a chance for NIO though it additionally signifies that it’s combating for market share with a number of rivals comparable to Tesla. That dangers reducing revenue margins, one thing that has already been weighing on earnings at Tesla.
NIO has some benefits: its premium branding is one and so too is its battery swapping expertise. The truth is, I believe that helps it overcome a barrier some drivers have with regards to buying an electrical car: journey vary.
In its most just lately reported quarter, NIO deliveries surged 75% in comparison with the prior yr quarter, topping 55,000.
It has the makings of a considerable enterprise with regards to revenues. However what about earnings?
Profitability considerations
The earnings outlook is the place questions concerning the enterprise mannequin actually kick in, one thing I believe helps clarify the downwards momentum of the NIO inventory worth just lately.
Final yr the enterprise misplaced $2.1bn. That was not its worst ever efficiency – it misplaced $3.4bn in 2018, for instance – however it’s a considerably poorer bottom line than the prior yr. The serially loss-making firm continues to spill crimson ink. For six years in a row, it has misplaced at the very least $700m yearly.
For now I should not have liquidity considerations. NIO had round $6.2bn of money and money equivalents on the finish of September. That’s ample for now, though I see a threat that sooner or later the corporate will dilute present shareholders to shore up its balance sheet.
What does concern me as a possible investor is: the place (if wherever) will the crimson ink finish?
Searching for extra indicators of money-making potential
Tesla misplaced billions of {dollars} earlier than transferring into the black.
Automobile meeting is a extremely costly enterprise to get into and NIO stays on the stage the place it’s making investments to ramp up the enterprise.
However its enterprise mannequin has not but confirmed that it may be worthwhile. The electrical car trade is an increasing number of crowded, placing strain on promoting costs – and revenue margins.
If that continues, which I believe it’s going to, NIO may get additional not nearer to profitability. That has been the case prior to now couple of years.
If the corporate strikes in direction of profitability, I believe the present NIO inventory worth may but appear to be a cut price. However, for now, I wish to see extra proof of a confirmed, worthwhile enterprise mannequin earlier than I contemplate investing.
