Could Nio Stock Help You Retire a Millionaire?

Nio (NIO 8.72%) became one of the market's hottest electric vehicle (EV) stocks during the apex of the growth and meme stock rally. The Chinese EV maker, which went public at $6.26 per American depositary share (ADS) on Sept. 12, 2018, saw its shares soar to an all-time high of $62.84 on Feb. 9, 2021. But today, its stock trades at about $7.

Therefore, a $1,000 investment in Nio would have blossomed to over $10,000 before withering back to about $1,100. Let's see why Nio lost its luster and whether it might still generate millionaire-making gains over the next few decades.

Image source: NIO.

Why did the bulls lose interest in Nio?

Nio produces a wide range of electric sedans and SUVs. Unlike many other EV makers that went public prior to ramping up their production, Nio had already started mass-producing its vehicles when it went public.

Nio initially dazzled the bulls with its triple-digit growth in deliveries in 2020 and 2021, which defied the pandemic-induced slowdown of the broader automotive market. But over the past two years, its deliveries decelerated as it struggled with supply chain constraints, macro headwinds, and a persistent pricing war across China's EV market.

Data source: Nio. YOY = year-over-year. YTD = year-to-date (through the end of November 2023). *Deliveries started in mid-2018.

That pressure also compressed its vehicle margins, which had expanded from 1.6% in 2018 to a peak of 20.1% in 2021 before dropping to 6.2% in the second quarter of 2023.

Nio differentiates itself from the competition with a network of battery-swapping stations that address the lengthy charging times for traditional EVs. However, Nio is spending a lot of money to expand that capital-intensive network as its vehicle margins shrivel. It's also developing its own first-party smartphones to complement its vehicles and showcase its own apps.

As a result, Nio's operating loss more than tripled from 4.5 billion yuan in 2021 to 15.6 billion yuan ($2.27 billion) in 2022, then widened year over year from 2.8 billion yuan to 6.1 billion yuan ($838 million) in the first half of 2023. It also ended its latest quarter with $9.5 billion in total liabilities and a high debt-to-equity ratio of 4.7.

As Nio's growth cooled off and its margins crumbled, rising interest rates popped its bubbly valuations and drove away the remaining bulls. At its peak, Nio's enterprise value hit $91.4 billion -- or 16 times the sales it would generate in 2021. Today, it's worth just $13.8 billion -- less than 2 times the revenue it's expected to generate in 2023. By comparison, Tesla trades at 8 times this year's sales.

Are brighter days ahead?

Nio's stock is clearly in the penalty box, and the escalating trade tensions between the U.S. and China make it an even less appealing investment. But if Nio weathers the pricing war in the EV market, stabilizes its deliveries, and successfully scales up its battery-swapping network, it could be cheap relative to its long-term growth potential.

Nio ended the second quarter of 2023 with $4.3 billion in cash, cash equivalents, restricted cash, short-term investments, and long-term time deposits. It also recently raised another $1 billion in convertible notes. That liquidity should buy it more time to turn its business around as the macro environment improves. Its gradual expansion into Europe and other overseas markets could also reduce its long-term dependence on China.

For now, analysts still expect Nio's revenue to grow at a compound annual growth rate (CAGR) of 35% from 2022 to 2025 as the market stabilizes. They also expect it to narrow its annual net losses from 2023 through 2025. We should take those estimates with a grain of salt, but they suggest its business isn't headed off a cliff yet.

Could Nio still be a millionaire-maker stock?

Assuming Nio's valuations hold steady at about 2 times sales, it would need to grow its top line at a CAGR of 26% over the next 20 years to turn a $10,000 investment into $1 million. But if it trades at a more reasonable 5 times sales, it would need to grow its sales at just under half that rate to become a millionaire-making investment.

In other words, Nio certainly has the potential to generate millionaire-making gains for daring investors who buy its beaten-down stock today. But the next few years will be critical for Nio's future. If it fails to fend off its competitors in China's increasingly crowded EV market, its stock could easily drop to zero instead of soaring to fresh all-time highs.