Carmaker NIO (NYSE: NIO) has certainly delivered some turns in the road for investors. A 93% fall in NIO stock since January 2021 means a much faster, further downhill ride than many would like. But, over five years, investors would still be up (albeit only by 3%).
But this could turn out to be a key year for NIO and its share price, I believe. Here’s why.
EV market-reckoning could be here
For some years, the electric vehicle (EV) market has been in the early stages of commercial development. Early adopters have given way to an increasingly mainstream customer set, new companies have piled in and carmakers have focused as much on technology development as scaling commercially viable business models.
I think that is now changing. A few large makers like Tesla and BYD are increasingly reaping the volume rewards of large-scale, long-term investment building their brands and developing technology.
The key question facing NIO is whether it can join the big boys, or fade away into insignificance.
But I reckon it has what it takes. Last month for example, its vehicle deliveries (heading towards 14,000) were 38% higher than last January.
Dilution risks, but long-term potential
What NIO does not yet have, unlike Tesla and BYD, is a proven business model. While revenues for its most recent quarter came in at around $2.6bn, the net loss for the period was roughly $721m.
With around $6bn of cash and cash equivalents, restricted cash, short-term investment and long-term time deposits on its balance sheet at the end of the quarter, NIO can keep burning cash for a while. But at its current rate it will probably need to raise more funds within the next two to three years, if not sooner.
That brings a clear risk of shareholder dilution. I think the tumbling NIO stock price reflects investor concern about cash burn.
If NIO can keep growing sales volumes that let it spread its fixed costs, it could move closer to breaking even, in which case the stock price could potentially soar. I reckon the firm’s distinctive car design and proprietary battery swapping technology could help it gain sales.
On the other hand, even if sales do grow, if NIO keeps burning cash like a drunken sailor, its business model will remain unproven and investors could mark the stock value lower even from here.
I think the coming year could turn out to be an important one for the business, as the rapidly evolving EV market could provide clearer guidance on how likely NIO is to succeed over the longer term.
I’m in wait-and-see mode
I have invested in loss-making, unproven businesses before now but have learnt my lesson and prefer not to.
Sometimes I am tempted – and I do see a lot to like about NIO. But for now I think the risks are too great for my tastes. I would rather wait, even if it means missing out on the chance to invest at today’s stock price, and see whether NIO can prove its business model more before I put any money into it.
