Should one Consider Buying, Selling, or Maintaining Their Investment in Nio?
Nio (NIO experiencing a -0.46% dip), an up-and-coming Chinese electric vehicle (EV) manufacturer, is eyeing a prosperous future in the burgeoning market by focusing on high-performance electric SUVs and sedans.
As per a report released by Frost & Sullivan, China's electric vehicle (EV) sector is projected to surge by 16% annually until 2030. However, before opting for shares in the EV producer, there are a few considerations to bear in mind first.
Nio's accelerated growth
Established in 2014 and based in Shanghai, Nio is one of the trailblazers leading the EV uprising. By the end of last year, Nio had become China's fifth-largest pure EV brand, with sales of around 160,000 units, amassing a market share of approximately 3%. Industry titans such as BYD (boasting 1.3 million EV sales) and Tesla (603,000 units) lead the pack.
A distinctive feature of Nio's business strategy is its Battery-as-a-Service model. This innovative approach to recharging enables drivers to swap depleted batteries for fully charged ones at battery-swapping stations, decreasing the wait times common with traditional charging methods.
Nio generates revenue through the sale of electric vehicles, its charging solutions (consisting of charging stations and battery swapping options), and subscription services, such as insurance, maintenance, roadside assistance, and user-tailored data services.
Growth at a substantial cost
Nio has shown exceptional growth, with revenues expanding at a compound annual rate of 50% from 2020 through last year. The company has consistently boosted its vehicle deliveries, indicating robust demand and its ability to adapt to meet these demands.
Despite this, the EV manufacturer has yet to register an annual profit, as it invests heavily in research and development, as well as expansion expenses. From 2020 to 2023, Nio accrued losses that escalated each year. This trend continued, with the EV manufacturer recording $2.1 billion in losses through three quarters of 2024.
As losses mount, one factor investors should monitor closely is shareholder dilution. Over a five-year period, Nio's outstanding shares have nearly doubled, from 1.03 billion to 2.06 billion. While this ensures necessary funds for operations, the long-term ramifications for existing shareholders are detrimental, as their value in the company gradually diminishes over time.
NIO Revenue (TTM) courtesy of YCharts
What awaits Nio?
For next year, Nio anticipates a doubling of its EV sales to 450,000 units. While its expanded scale may aid its progress towards profitability, the company encounters intensified competition in the coming year.
Goldman Sachs analysts anticipate that Nio's plan to expand its Onvo sales network will likely result in heightened expenses and further operating losses. Bank of America analysts share similar apprehensions, forecasting that projected volume growth this year could be offset by a slower rate of margin expansion and escalating operational expenses.
Nio also grapples with regulatory risks due to trade disputes and tariffs. For instance, in October, the European Union imposed tariffs on EVs imported from China, contending that Chinese EV makers enjoy substantial government subsidies that enable them to undercut rival manufacturers.
Earlier this year, the Biden administration imposed new tariffs on China's EVs, batteries, and solar cells. Moreover, President-elect Donald Trump had threatened to impose supplementary tariffs as part of the ongoing trade confrontations between China and the U.S.
In light of the challenges and opportunities in the EV market, diligent investors might consider exploring potential investment strategies related to Nio's financial performance. For instance, they could examine the company's approach to managing its substantial research and development expenses, or analyze the impact of shareholder dilution on the value of existing shares.
Furthermore, keeping a close eye on Nio's plans to expand its Onvo sales network can help investors assess its potential for further growth and profitability, while also evaluating the potential impact of increased operational expenses on the company's overall financial performance.
