Image source: Sam Robson, The Motley Fool UK
NIO (NYSE: NIO) stock’s been on a wild ride since listing in 2018. It lost around 80% of its value within 12 months, before embarking on an epic 3,800%+ surge. Unfortunately for shareholders, this epic bull run ran out of steam. And from a peak of $62, NIO’s fallen all the way down to just under $5.
The question now is, should I add this electric vehicle (EV) stock to my portfolio before the firm reports Q2 earnings in September?
Innovation
Let’s start with some things that I like about NIO when I look at it as a potential investment. First off, it’s a Chinese carmaker, so is operating in the world’s largest EV market by far.
According to forecasts, China’s EV penetration’s going to be far ahead of global averages in future (almost total electrification by 2040). If brands can survive and thrive in this large and ultra-competitive market, they have enormous global export potential.
Secondly, the company does stand out from the crowd in terms of innovation. It now has 3,445 battery-swap stations across China (mainly) and Europe. At these, drivers can quickly replace a depleted EV battery with a fully-charged one in as little as three minutes (a lot quicker than charging).
However, nearly all people using these stations are subscribers to NIO’s Battery-as-a-Service (BaaS) plan. This means they’ve bought the vehicle without the battery, which lowers the up front purchase price. In exchange, they pay a monthly subscription for the battery and swap station access.
The company has now offered more than 78m battery swaps to users in total.
The benefit of this for NIO is two-fold. Not only does it tempt buyers in with a lower upfront price, but the firm can then make potentially lucrative BaaS recurring revenue for many years. I find this prospect attractive.
Finally, unlike Tesla, NIO’s still growing strongly. In the second quarter, it delivered 72,056 vehicles, representing an increase of 25.6% year on year. It’s launched two sub-brands, Onvo and Firefly, which are cheaper than the main premium NIO brand.
Things I don’t like
However, I also see two of these as double-edged swords. While China’s a vast and exciting market, it’s also experiencing an intense EV price war. This isn’t ideal for NIO’s margins and profits. The firm’s never come close to turning a profit, which adds a high degree of risk.
Second, building battery-swap stations is enormously capital intensive. It’s brought in battery giant CATL as a partner to help with this, but there’s no guarantee this build-out will prove profitable.
Indeed, the network could end up obsolete if battery-charging technology improves and allows drivers to charge a battery in a very short space of time. This is one fear I can’t banish from the back of my mind.
My verdict
If NIO can keep growing strongly and make significant progress towards portability, the stock could be a massive winner from $5. Especially as it’s trading at less than one times forecast 2025 sales.
However, the EV maker isn’t expected to become profitable for a few years. This makes the stock too risky for my liking.
Weighing things up, I think there are better growth shares out there for my money right now.
