Picture supply: Sam Robson, The Motley Idiot UK
This yr has begun poorly for shareholders in electrical automobile maker NIO (NYSE: NIO). NIO inventory has tumbled 31% for the reason that begin of final month. Over 5 years, it’s down 42%.
However, with a market capitalisation of $12bn even after the autumn, NIO remains to be a sizeable inventory market presence. So, ought to I benefit from the a lot cheaper price to purchase some shares for my portfolio?
Can NIO thrive?
The primary query I ask as an investor when contemplating the attainable deserves of a share is what I believe the long-term prospects of the enterprise are.
That isn’t the one factor that issues: valuation is necessary too. However until the enterprise seems like it’s going someplace good, I cannot even trouble contemplating its valuation.
The electrical automobile market is already massive and I anticipate it to develop considerably in coming years. That provides a possibility for NIO though it additionally implies that it’s combating for market share with a bunch of opponents similar to Tesla. That dangers slicing revenue margins, one thing that has already been weighing on earnings at Tesla.
NIO has some benefits: its premium branding is one and so too is its battery swapping know-how. In truth, I believe that helps it overcome a barrier some drivers have in terms of buying an electrical automobile: journey vary.
In its most not too long ago reported quarter, NIO deliveries surged 75% in comparison with the prior yr quarter, topping 55,000.
It has the makings of a considerable enterprise in terms of revenues. However what about earnings?
Profitability considerations
The earnings outlook is the place questions in regards to the enterprise mannequin actually kick in, one thing I believe helps clarify the downwards momentum of the NIO inventory worth not too long ago.
Final yr the enterprise misplaced $2.1bn. That was not its worst ever efficiency – it misplaced $3.4bn in 2018, for instance – however it’s a considerably poorer backside line than the prior yr. The serially loss-making firm continues to spill purple ink. For six years in a row, it has misplaced not less than $700m yearly.
For now I don’t have liquidity considerations. NIO had round $6.2bn of money and money equivalents on the finish of September. That’s ample for now, though I see a danger that in some unspecified time in the future the corporate will dilute present shareholders to shore up its stability sheet.
What does concern me as a possible investor is: the place (if anyplace) will the purple ink finish?
Searching for extra indicators of money-making potential
Tesla misplaced billions of {dollars} earlier than shifting into the black.
Automotive meeting is a extremely costly enterprise to get into and NIO stays on the stage the place it’s making investments to ramp up the enterprise.
However its enterprise mannequin has not but confirmed that it may be worthwhile. The electrical automobile business is increasingly crowded, placing strain on promoting costs – and revenue margins.
If that continues, which I believe it’s going to, NIO might get additional not nearer to profitability. That has been the case up to now couple of years.
If the corporate strikes in direction of profitability, I believe the present NIO inventory worth might but seem to be a discount. However, for now, I want to see extra proof of a confirmed, worthwhile enterprise mannequin earlier than I contemplate investing.
