Investors loved the prospects for Chinese electric-vehicle (EV) maker Nio (NIO 11.65%) two years ago when they drove its market cap to nearly $100 billion. But that speculative bubble has since burst, and the price of Nio's American depositary shares has plummeted since their peak in early 2021.
Yet Nio has continued to increase its rate of production and steadily increased annual revenue over the last five years. It operates in the two fastest-growing EV markets in China and Europe, which gives it an opportunity to succeed. But it has also stumbled along the way.
With the company's stock price at its lowest level in three years, many investors wanting exposure to the EV sector may be wondering if Nio is a stock to buy now.
Macro picture looks good
The foundation of a successful business is having a large or growing market for its products. China is the largest automotive market and has led the global transition to the adoption of EVs. In April 2023, new energy vehicles -- which include battery, as well as plug-in hybrid electric -- accounted for nearly one-third of all passenger vehicles sold in China.
That demand has helped Nio increase its annual revenue nearly tenfold over the past five years.
Data source: Nio. Chart by author.
In that time, the company has launched new models, including two electric sedans, and continued to advance its technologies, like its unique battery-swap stations. Nio, along with its manufacturing partner, has also added a second plant, pushing its theoretical production capacity to at least 600,000 vehicles per year.
Yet the company is far from realizing that volume of vehicle sales, even as it has expanded deliveries beyond China into the European market.
Struggles continue
Last year, restrictive COVID-19 policies caused Nio's production to be suspended multiple times. This impacted consumer demand. Supply chain issues also hurt vehicle production, and the company has been slow to recover.
While overall production has grown steadily, on average, in the last two years, the more recent trend hasn't been favorable, as can be seen in the graph below. Nio grew deliveries by 22% in the first four months of 2023 versus last year. Investors expected more, and the trend has been heading in the wrong direction in recent months.
Data source: Nio. Chart by author.
In addition, the company hasn't turned its growing revenue into profits. Its net loss soared to more than $2 billion in 2022. Nio's runway to profitability now looks much longer than it did just one year ago.
The long game
Investors in a speculative, unproven company like Nio need to have a long-term view. Many have given up on the company, and the share price has dived as a result. The outcome has been a more than 85% drop in Nio's market cap from its peak to a recent $13 billion.
That puts the stock at a price-to-sales (P/S) ratio of below 2. But Nio has to turn those sales into profits for an investment to ultimately succeed. The company also faces stiff competition in its home market from larger companies like Tesla and BYD, as well as smaller, early stage EV makers.
Investors who want to participate in the EV growth sector shouldn't completely count on long-term success from Nio. But the company is still in a reasonable position to turn things around. It ended 2022 with about $6.6 billion in cash and equivalents on its balance sheet.
That gives Nio time to show it can swing back to strong growth and work toward profitability. Investors who want to bet that there will be many winners in the biggest global EV markets still might want to put Nio into a basket of speculative stocks -- as long as they have a proper allocation.
