With its shares down 10% year to date, Nio (NIO 8.72%) has had a tough go of it lately. Like many electric vehicle (EV) makers, it faces a challenging combination of rising rates, competition, and cash burn that puts its viability in question. Will the automaker be able to overcome these challenges in the next five years or continue underperforming the market? Let's dig deeper to find out.
What went wrong for Nio?
Nio is a China-based EV company that entered U.S. financial markets through an initial public offering (IPO) in 2018. But while its shares soared in the post-pandemic period, they are now down 86% from an all-time high of $63 in early 2021. To be fair, much of Nio's previously high stock price was likely due to overvaluation. The shares had a price-to-sales (P/S) multiple of around 34 at peak compared to the S&P 500 average of 2.4.
But fundamental factors are also at play. The company's second-quarter earnings highlight its perilous position. Vehicle sales fell 24.9% to $990.9 million, while vehicle margins collapsed from 16.7% to just 6.2%. Nio is reeling from rising competition as industry leaders like Tesla aggressively cut prices to offset slowing demand.
The problem is that despite being a serious contender in the EV industry (Nio sold over 122,400 cars in 2022), its cash burn is abysmal. Second-quarter operating losses more than doubled to $837.7 million as a combination of lower revenue and smaller margins took their toll.
Near-term losses are normal for growth-focused companies as they scale up their operations. But the EV price war has no end in sight. And over the coming years, Nio might have to rely on debt and equity dilution to stay afloat.
Can Nio build a moat for itself?
Over the next five years, Nio's survival could depend on differentiating itself from mass-market rivals like Tesla, which might be able to use economies of scale to beat it based on price. Nio's unique battery-swapping technology might help it reach this goal.
It can take 20 minutes or longer to charge an electric car, which is roughly 5 to 10 times longer than the average time for a gasoline fill-up. Nio aims to solve this problem through a battery-as-a-service system, which allows drivers to quickly swap out their spent batteries for new ones through a one-time payment or recurring subscription.
Image source: Getty Images.
According to the company website, it takes 3 minutes to swap batteries, and it plans to have 2,300 stations globally by the end of the year. Nio cars can also use traditional charging stations, and that added flexibility could help them compete on more than just price.
Nio is also expanding its unorthodox approach with a new smartphone designed to be used with its EVs. But while this product includes connectivity features (such as a virtual key), it is unclear if it can offer a significantly improved user experience compared to a mobile app.
Nio stock's outlook over the next five years
The next five years will be difficult for Nio because the company's core problems with cash burn and competition show no signs of easing soon. And its efforts to differentiate itself from rivals have yet to translate to better margins, if they ever do.
That said, the stock is dirt cheap with a price-to-sales (P/S) multiple of 2.2 (compared to Tesla's 9.7). While shares are a hold for now, investors should keep a close eye on Nio because of its low valuation relative to its potential.
