Earlier this year, Nio (NIO 8.72%) shares dropped to multi-year lows as the Chinese electric vehicle (EV) maker struggled to regain momentum after it worked to recover from various production and delivery headwinds.
Yet, in the past month its American depositary shares have soared by about 30%. The company seemed to justify that optimism when it reported monthly June delivery data. It showed a sharp rebound in deliveries following a string of four consecutive monthly declines.
But valuation and profitability should be part of the equation for investors, and right now there are better ways to invest in the largest EV market in the world. Let's dive in.
The focus on China
Electric vehicle adoption is growing globally, but China is the biggest market. That's one reason EV leader Tesla (TSLA -1.11%) has its largest manufacturing plant in Shanghai. But many investors also see plenty of potential in local Chinese companies like Nio, XPeng, and Li Auto. There's good reason for that since these companies have support from the Chinese government, know the market well, and offer advanced technologies.
One example of the support from Chinese authorities is that Nio's manufacturing partner is a state-owned entity. So the government has a stake in Nio's success. That's why investors have high hopes for the company. That has led to a market capitalization of more than $16 billion even though the company has yet to make a profit.
Some investors had already given up on Nio, though, as it struggled to keep production volume going through supply chain and other headwinds in China. Its market capitalization was over $21 billion earlier this year. But if June deliveries are an indication, Nio may be overcoming those earlier struggles. Deliveries rebounded to more than 10,700 EVs in June after a string of monthly declines.
Data source: Nio. Chart by author.
Build your dreams
But investors still need to put those numbers in perspective. Nio and the other previously mentioned Chinese EV makers are far from the biggest in China. That label belongs to BYD (BYDDY 4.08%), which can claim Warren Buffett's Berkshire Hathaway as a large shareholder.
And it's not even close. While Nio delivered about 23,500 vehicles in the second quarter, BYD reported record quarterly deliveries of more than 700,000 electric vehicles. BYD also sells plug-in hybrid models, but even its pure battery-electric model sales nearly doubled to 350,000 versus the prior-year period.
Tesla reported deliveries of more than 466,000 for the second quarter globally, which likely included about 155,000 in China, according to Barron's. (Tesla doesn't break down its deliveries by geography.) For perspective, Nio, XPeng, and Li Auto combined for about 133,000 deliveries, up about 50% over last year.
Betting on an underdog
After reporting a net loss of more than $2 billion in 2022, Nio began 2023 on a similar trajectory. Its net loss was almost $700 million in the first quarter. While second-quarter deliveries have been reported, Nio (and others) won't release full financial results for the quarterly period for several weeks. But it clearly has a long road to profitability.
At the same time, Tesla and BYD are both highly profitable already and are growing market share in China. BYD's net profit rose fivefold in the first quarter to about $600 million. The profitability of those larger competitors gives them both a major competitive advantage.
It allows them to lower prices to stoke demand while still generating profits. Nio has had no choice but to match Tesla's price cuts in China even though it means accelerating losses.
Buying Nio shares certainly means betting on the underdog in the EV sector. It has been growing its business in Europe, too, but so have Tesla and BYD. Nio stock is a speculation that EV adoption will grow globally to dominate automotive sales. If that occurs in the coming decades, and if Nio can attain positive cash flow to survive, it could also be a successful EV investment.
For now, however, it makes more sense to own the leaders like Tesla and BYD.
