The electric vehicle (EV) market has been a wild ride for investors in recent years, and few stocks exemplify this more than Chinese carmaker NIO (NYSE: NIO). Once a darling of the market, NIO’s shares have experienced a dramatic fall from grace, leaving many investors wondering whether it’s time to cut their losses or double down on this volatile stock when it’s cheap.
What went wrong?
The journey has been nothing short of tumultuous. After reaching dizzying heights in 2021, propelled by enthusiasm for the EV sector, investors have experienced a steep downward trajectory. In fact, 2024 has proven particularly challenging, with the stock plummeting over 40% since the start of the year.
But what’s behind this precipitous decline? Supply chain issues during the pandemic severely impacted vehicle production, denting investor confidence. Moreover, NIO’s unique battery-swapping technology, once seen as a key differentiator, is now facing questions about its long-term viability as competitors advance rapid charging solutions.
Despite these difficulties, management isn’t throwing in the towel. The company has been actively expanding its product lineup, including the launch of its more affordable Onvo brand to compete with Tesla‘s Model Y. Additionally, the firm secured a significant $2.2bn investment from Abu Dhabi-based CYVN in 2023, providing much-needed capital and potentially opening doors in the Middle East market.
However, the company remains unprofitable, and its path to profitability is unclear. Management has been diluting shares at an alarming rate, with outstanding shares growing by 24% in the past year alone. This dilution significantly erodes the value of existing shareholders’ stakes, even beyond the volatile share price. For me, this is a big red flag, and doesn’t inspire much confidence for future investors.
The numbers
On the valuation front, the company’s price-to-sales (P/S) ratio of 1.4 times is lower than the sector average of 2.7, potentially indicating some value. With sales growth expectations of 19% over the coming years, many investors might see an opportunity. However, it’s crucial to weigh this against the company’s ongoing losses and share dilution.
Looking at the broader picture, the global EV market is expected to see significant growth in the coming years, driven by environmental concerns, government incentives, and technological advancements. As a leading player in the Chinese market, the firm is well-positioned to capitalise on this trend. However, competition in the EV space is intensifying, with both established carmakers and new entrants vying for market share.
Worth the risk?
For me, NIO presents a high-risk-but-potentially-high-reward proposition. While the company has shown resilience and adaptability in a challenging market, its financial fundamentals remain concerning. The lack of profitability, combined with aggressive share dilution, paints a picture of a company prioritising growth at all costs — a strategy that may not be sustainable in the long term.
So while potential in the burgeoning EV market is undeniable, the company’s current trajectory raises serious questions. Whether management can turn the car around and reverse the company’s fortunes remains to be seen, but one thing is certain – the stock’s not for the faint-hearted. I’ll be avoiding it for now.
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Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
