Like many companies in the electric-vehicle (EV) space, Nio (NIO 1.62%) has seen a massive valuation drawdown in the face of industry pressures, macroeconomic challenges, and increased aversion to growth stocks among investors. The Chinese auto company's share price trades down a staggering 86% from the high it reached in February 2021.
Should investors buy this high-risk, high-reward EV stock on the pullback, or is there still too much downside potential even on the heels of its big sell-off? Read on for competing bullish and bearish takes on the stock from two Motley Fool contributors.
Image source: Getty Images.
Bear case: Nio is not growing profits, and that matters more than sales
Parkev Tatevosian: My bear case on Nio centers on its slow progress toward profitability. The company has done a solid job of ramping up production and rolling out its battery-swapping technology. However, losses on the bottom line are mounting, with no end in sight.
Making matters worse, a price war is percolating in the electric vehicle industry. Tesla (NASDAQ: TSLA) announced several rounds of price cuts across several of its models. Rivals are responding with reductions of their own. Fierce competition is rarely conducive to profitability in an industry.
Indeed, Nio's operating losses have ballooned from $705 million in 2020 to $2.2 billion in 2022. Simultaneously, its sales have exploded from $2.5 billion to $7.1 billion. It seems that the more Nio sells, the more money it loses. That might be an oversimplified observation because the company is laying the groundwork for what could be profitable years in the future. Still, investors have yet to see strong evidence of that happening.
NIO PS Ratio data by YCharts.
The stock is selling for a price-to-sales (P/S) ratio of 1.9, which is near the lowest multiple it has borne in several years. However, I am sometimes skeptical of P/S multiples when a company consistently loses money on the bottom line. It's easier to sell your products and services when you price them at less than it costs to create them.
For those reasons, investors looking for a growth stock with potential might be better served by searching elsewhere.
Bull case: Attractive valuation against a promising industry backdrop
Keith Noonan: Despite growing vehicle revenue roughly 60% year over year in the fourth quarter, Nio missed its vehicle delivery target and posted a much wider-than-expected loss. With its research-and-development costs more than doubling last quarter and manufacturing expenses rising as well, the business dove deeper into the red, and the share price slumped following the earnings release.
Potentially adding more cause for concern, guidance for vehicle deliveries to be between 31,000 and 33,000 in the first quarter suggests a roughly 20% unit decline on a sequential basis.
Investors have been jumpy when it comes to EV stocks lately, and growth-dependent stocks generally remain out of favor with the market due to the slew of macroeconomic pressures and uncertainties at hand. Accordingly, it's not surprising that the market reacted very negatively to Nio's Q4 results and short-term guidance.
But risk-tolerant investors should give the stock consideration at current prices. As Parkev noted above, Nio's trailing P/S ratio of 1.9 sits near its historical low. Looking ahead, the company's forward P/S ratio is even more striking.
NIO PS Ratio (Forward) data by YCharts.
After some brutal sell-offs, Nio's forward price-to-sales level has been pushed down to roughly 1.2, a level that looks low considering that the company is still growing revenue at a fast clip. Admittedly, the EV player still needs to prove that it can shift into delivering profits, but there's a path to achieving that feat as the business taps into the growth of China's EV market and leverages economies of scale.
The sequential decline for deliveries expected this quarter largely appears to be due to vehicle launch cycles, and new vehicle debuts later in the year should do a lot to reverse this trend. In fact, management anticipates achieving a monthly delivery rate of roughly 30,000 vehicles by the end of the year. If the business can hit that target, sentiment surrounding the stock could change quickly.
At current prices, Nio trades just 6.5% above its lifetime low, and shares could be worthwhile for investors seeking high-risk, high-reward plays.
Should you buy Nio stock today?
Unless you have above-average risk tolerance, Nio might not make for a sensible portfolio addition. Macroeconomic conditions are pressuring valuations for growth stocks right now, and the EV maker is facing mounting losses and some tough competition.
On the other hand, for more risk-tolerant investors aiming to build exposure to China's EV market, the stock could have appeal following recent pullbacks. The stock trades in the neighborhood of its lifetime low, the business is scaling rapidly, and shares could deliver explosive upside if Nio can leverage increasing scale to shift into delivering consistent profits.
