With its share price down by a whopping 60% over the last 12 months, Nio (NIO -5.00%) has dramatically underperformed the S&P 500 index, which has fallen by a much milder 9% in the same time frame. The automaker is reeling from a tightening macroeconomic environment and possible softening demand in the EV industry. But is this an opportunity for daring investors to buy the dip, or should they stay far away?
What is Nio?
Based in Shanghai, NIO is a Chinese electric automaker that entered the U.S. markets through an initial public offering (IPO) in 2018. The company has several potential advantages. China is, by far, the biggest EV market in the world, responsible for two-thirds of global sales. And its government aims to make EVs represent 40% of vehicles sold in the country by 2030 through tax breaks, subsidies, and other incentives.
Nio will have to compete with rivals such as Tesla (TSLA -1.92%), which is also betting on the Chinese market. But the company seeks to differentiate itself through a business model called battery-as-a-service (BaaS).
While Nio's cars can be charged like any other EV, they are also designed to allow users to rapidly swap out used batteries for fully charged new ones through a network of swapping stations. According to the company website, this process takes just three minutes -- substantially faster than the 15 minutes it takes to charge a Tesla for 200 miles at a supercharger. Tesla charging can take even longer if the user wants a full charge or uses third-party charging infrastructure, which can take hours.
What is going wrong?
Despite its innovative business model, Nio stock has performed poorly in the near term. The weakness may have a lot to do with its unprofitability. Despite third-quarter revenue jumping 33% to $1.8 billion, the company's net loss ballooned by almost 400% to $578 million.
Image source: Getty Images.
There are also signs that consumer demand for EVs could be weakening, pushing current market leader Tesla to reduce its car prices by 20% globally. But unlike Nio, Tesla generated a net income of $3.7 billion in its most recent quarter. And as a profitable company, it can keep its prices lower for longer and possibly outcompete more cash-hungry rivals.
To be fair, Nio has the support of the Chinese government, which saved the company from possible bankruptcy through a $1.4 billion bailout in 2020. But while such moves provide a safety net for the company, they don't necessarily mean it will create value for investors. Expect Nio's already-massive losses to worsen as competition heats up in the EV industry.
What about the valuation?
With a price-to-sales (P/S) multiple of 2.8, Nio stock is significantly cheaper than Tesla, which trades for 8.6 times its revenue. But while Nio might look like a great deal on the surface, investors may want to think twice before betting on the company.
Despite its innovative business model, the automaker's astronomical cash burn looks unlikely to end anytime soon, especially as Tesla flexes its muscles by lowering prices. Investors may want to avoid the stock or wait for a few more quarters of data before taking a position.
