Chinese electric vehicle (EV) maker Nio (NIO 3.49%) is part of a long list of beaten-down EV stocks that the growth stock sell-off has particularly affected.
But unlike more-speculative EV companies that merely promise production progress, Nio was producing over 3,500 cars a week by December as Chinese demand continues to grow.
Below, two Motley Fool contributors discuss the pros and cons to determine if now is the time to dive headfirst into this exciting EV opportunity, or if the risks outweigh the potential reward.
A Nio ET5 sedan. Image source: Nio.
Beware of the competition
Howard Smith: Nio disappointed investors recently when it reported its fourth-quarter and full-year 2022 results. It had a fourth-quarter loss of $0.51 per share on sales of $2.3 billion. Wall Street analysts had been expecting a loss of $0.26 per share from revenue of about $2.5 billion. But those figures weren't where investors saw the real problem.
The company said it expects to deliver between 31,000 and 33,000 vehicles in the first quarter of 2023. That implies a sharp drop from the more than 40,000 units it delivered in the fourth quarter. Investors wanting to buy Nio stock need to see a more consistent ramp-up in production and sales. While there will inevitably be short-term bumps along that road, there might be a more substantial challenge Nio is facing.
That challenge comes from increasing competition in its home market and beyond. There's much talk about Tesla's business in China with its Shanghai factory. But there's an even bigger competitor there now. BYD (BYDDY 2.01%) has been in the portfolio of Warren Buffett's Berkshire Hathaway since 2008 for a reason. Buffett and his partner Charlie Munger believed in BYD management, and other investors are now starting to see why.
BYD is now the world's biggest manufacturer of plug-in EVs. It sold 1.9 million of them in 2022, compared with Tesla's 1.3 million. It has pivoted from internal-combustion engines and now produces full EVs and plug-in hybrid vehicles. Nio delivered just 122,486 in 2022 by comparison.
While the market for EVs continues to grow at a rapid pace, Nio is losing ground on its home turf. That could affect its long-term potential to be a leader in the sector. That doesn't mean the company won't become profitable. But it does mean that even aggressive investors should be very wary of going all-in on Nio stock.
Nio has a tough road ahead
Daniel Foelber: Nio delivered 122,486 vehicles in 2022, a 34% increase compared to 2021. But as my colleague mentioned above, the company is squaring off with stiff competition in China: BYD and Tesla. As Nio expands in Europe and the U.S., it will directly compete with legacy automakers that are investing billions to take a slice out of the EV pie.
Nio's newest EV, the ET5, is priced similarly to the Tesla Model 3 and the Xpeng P7 and features an impressive range and battery life. Aside from a compelling product at a reasonable price, Nio has a unique battery swap program that offers chargeable, swappable, and upgradable batteries in a mix of home and on-the-go solutions. In this regard, Nio is far more built-out and proven than U.S.-based EV start-ups.
The biggest challenge for Nio is that its newer models are getting closer and closer to the price range of Tesla and BYD, while its higher-priced EVs will soon compete with attractive offerings from legacy luxury automakers. The biggest red flag for investing in Nio stock is that it's harder to define its niche or its competitive advantages, as well as forecast a sustainable path to profitability.
Since going public in September 2018, revenue and profit have trended in opposite directions.
Data by YCharts.
The company posted all-time-high revenue in 2022 -- but also its largest-ever loss. The good news is that Nio's valuation is looking more attractive given its high revenue and languishing stock price. Its market cap is around $15.3 billion, and the price-to-sales ratio is hovering around 2, which is far more reasonable than other EV start-ups. So while now isn't the time to go all-in on Nio, the stock sell-off presents a good time to open a starter position.
Nio's risks aren't going away
When capital was cheap, interest rates were low, and growth was highly rewarded, Nio quickly turned itself into a Wall Street darling. But now, it finds itself in "prove it" mode.
Though its production volumes are far ahead of American EV start-ups, Nio is still losing a ton of money, and the Chinese EV industry is chock-full of worthy competitors.
Nio stock is definitely worth a look at these levels. But the best approach, if any, would be to add shares to a diversified portfolio instead of going all-in even after the stock's brutal sell-off.
