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It’s been a dreadful three years for buyers in NIO (NYSE: NIO) inventory. Over that interval, it’s down a stunning 90% and just lately plumbed a 52-week low.
Ought to I attempt to catch this falling knife at $6? Let’s focus on.
Issues to love
At first look, there are a variety of issues that I discover interesting about NIO from an funding perspective. First, it sells electrical autos (EVs) in China, which is by far the world’s largest EV market.
In line with Bloomberg’s New Power Finance report, EV gross sales are set to develop to 56m by 2040, up from about 6.6m in 2021. That can signify roughly 58% of world automobile gross sales, with China anticipated to keep up its main place.
Second, NIO has established its premium model within the extremely aggressive Chinese language market, suggesting it may need a neater time succeeding in much less aggressive overseas markets. That’s not assured, after all, however Elon Musk has mentioned that Tesla‘s stiffest competitors will probably come from world Chinese language producers.
Third, the agency is extraordinarily forward-thinking. It has constructed out 2,226 battery-swapping stations as a part of its ‘battery-as-a-service’ subscription bundle. This affords prospects the power to swap an EV battery in as little as three minutes.
It plans to construct one other 1,000 of those NIO Energy stations in 2024, together with throughout Europe. Notably, it has introduced partnerships right here and is opening up its swapping community to your entire Chinese language EV trade.
Within the medium time period, this has the potential to enhance the corporate’s funds because it shares the R&D and price burden whereas opening up licencing charge prospects.
Many unknowns
My drawback is that for each optimistic I additionally see a possible unfavourable. The continued EV value conflict isn’t superb for revenue margins. NIO’s automobile margin contracted to 11% in Q3 2023 versus 16.4% in Q3 2022.
In the meantime, it’ll need to maintain advertising bills excessive, particularly because it rolls out new fashions. Within the final quarter, promoting, basic, and administrative bills rose 37.5% 12 months on 12 months and 28.1% sequentially from the earlier quarter.
Moreover, profitable worldwide growth isn’t assured. The European Fee is contemplating punitive tariffs to cease China from flooding the EU market with state-subsidised EVs.
I’d think about there will probably be comparable powerful speaking round US-China commerce relations as a part of the forthcoming US election.
Lastly, the battery-swapping stations may in the end show to be a cash pit quite than a novel worth proposition. That mentioned, there have been 32m such swaps to this point and managements says it’s the “most trusted charging solution” for purchasers.
My transfer
My largest concern, nonetheless, is that the agency is transferring additional away from profitability.
In Q3, it reported sturdy gross sales of $2.38bn, which was 47% larger than final 12 months. However the firm’s quarterly working loss grew 25% to $664m, pushed partly by new mannequin launches.
As of September, the money place remained sturdy at $6.2bn, however I discover the mounting losses worrying.
This in all probability explains why the inventory is buying and selling at a price-to-sales a number of of simply 1.37. That’s the most affordable it’s ever been.
For context, Tesla trades for a P/S ratio of seven.7 and Rivian Automotive 3.85. Whereas the inventory seems dust low cost, it’s nonetheless too dangerous for me. I feel it might fall additional.
