Nio (NIO -0.36%) is a leading player in China's electric vehicle (EV) market and has sometimes been referred to as the "Chinese Tesla." The company has continued to increase vehicle deliveries and sales, but it's still operating at a loss, and its share price has taken a big hit as investors have moved out of growth-dependent stocks.
Should investors treat Nio's big valuation pullback as an opportunity to build a position in the stock, or is the EV company's share price still too high to generate strong returns? Read on for bullish and bearish cases.
Image source: Nio.
Be sure to gauge your risk tolerance
Howard Smith: Nio's recently released quarterly earnings report provided a good lesson for investors wanting to log big returns on more speculative, high-growth companies. One year ago, Nio reported a net loss of under $100 million in the 2021 second quarter, and investors and analysts were talking about just how soon the company would become profitable.
But Nio has been struggling with production for several reasons, and its 2022 second-quarter net loss was a whopping $412 million. That kind of reversal should have plenty of investors checking their risk tolerance for an investment in Nio.
The company operates in a fast-growing sector in the world's largest automotive market. So there is plenty of potential. But auto manufacturing is also a capital-intensive business, and production must be achieved consistently at scale. Nio continues to increase its production volume, but at a much slower pace than many investors would like to see. A graph of monthly deliveries since the start of 2021 shows the lack of explosive growth and some inconsistency.
Data source: Nio. Chart by author.
There are reasons for that which have been affecting other automakers and aren't unique to Nio's business. But supply chain snarls, raw material costs, and other headwinds still have to be managed and resolved. The company should have plenty of cash to navigate the challenges, but it won't be a short-term fix.
Profitability still looks to be off in the distance, and the next couple of years will be critical. The company has new models being launched and is expanding into export markets. But those who want to bet on Nio need to approach the investment with an appropriate risk tolerance and an especially long time horizon. Others should look to invest elsewhere.
Nio's growth outlook remains promising
Keith Noonan: Weakness in the Chinese economy, pandemic lockdowns, the global semiconductor shortage, and recent moves from the U.S. to ban the export of high-performance chips to China have all had a negative effect on Nio's valuation. While the EV player is clearly facing some powerful headwinds right now, the company's long-term opportunity remains promising, and concerns about the business may be overblown.
Revenue grew roughly 21.9% year over year in the quarter to reach $1.54 billion. While that rate of revenue expansion is a far cry from the 127% sales growth it posted in last year's second quarter, the company's core business continues to look solid despite macroeconomic headwinds, and performance should be stronger in the current quarterly period.
Nio expects third-quarter sales to grow between 31% and 38.7% year over year. Meanwhile, the company anticipates delivering between 31,000 and 33,000 vehicles. The midpoint of that target represents growth of roughly 31% year over year and suggests that performance is picking back up after the relatively soft second quarter.
Nio has opportunities to improve its margins as vehicles with higher selling prices come to account for a greater portion of revenue and the overall business continues to scale. While the company's losses have accelerated recently, Nio still has roughly $7.5 billion in cash and short-term equivalents, and its financial position looks solid. China is a massive auto market, and the company is positioned to benefit as EVs come to account for a greater share of industry sales.
With the stock down roughly 72% from the high it hit last year, Nio has big upside potential at current prices.
Should you buy Nio stock today?
Nio still has big long-term growth potential, but investors should weigh their personal risk tolerance and outlook on China's EV market before investing in the stock. For risk-averse investors, Nio probably isn't a great portfolio fit even after recent sell-offs. On the other hand, the stock could go on to be a big winner for long-term investors who are willing to embrace the volatility and risks that come with investing in growth-dependent EV companies.
