Is Nio Stock a Buy?

There was both good news and bad news for investors when Chinese electric vehicle (EV) maker Nio (NYSE: NIO) reported its fourth-quarter and full-year 2023 results in early March. Nio’s vehicle deliveries were 25% higher year over year in the quarterly period. And revenue for the full year rose by 13% to a new record.

But competition in the Chinese EV market heightened last year, leading to lower prices as EV makers tried harder to woo buyers. That led to a drop in vehicle margins from almost 14% in 2022 to below 10% in 2023. The bottom-line result was a sharp increase in net losses. That pattern can’t continue if Nio is going to survive. But an important new catalyst is on the way.

Mass market EV

Nio has discussed expanding its potential market with less expensive EVs. The company now says it will officially reveal a new mass market brand in May. The new EV brand will reportedly be called “Le Dao” in Chinese. That name is intended to refer to a path or way of life. Nio is targeting the family market with the vehicle. If it follows in line with other Chinese EV makers starting mass market brands, it could be priced as low as about $20,000.

Nio could use a sustainable boost to its vehicle sales. While deliveries have continued to increase, the company has found it difficult to maintain sales growth momentum.

Data source: Nio. Chart by author.

If the company successfully launches its lower-priced brand, that could stimulate that growth when large-scale deliveries are expected to begin in late 2024. For investors, that raises the question of whether it would make sense to buy the stock ahead of that potential new catalyst.

Understanding the risks

No investor should jump into a stock based on a potential future catalyst without understanding the risks, too. Many of those risks have surfaced over the last year and are why Nio stock is down by over 40% year to date.

Competition is just one factor hindering Nio’s growth trajectory. But it’s a big factor. The two largest EV makers in the world have a focus on the Chinese market — both Tesla and China-based BYD sell significantly higher volumes in China. Several smaller rivals are also growing. XPeng is one of those rivals; that company also announced plans for a mass market brand last year.

All of that competition led to vehicle price wars to attract business. The slowing Chinese economy was also a major factor leading to lower prices. Of course, lower pricing means lower margins or profits. The impacts from China’s economic woes also remain.

Nio began diversifying geographically so it isn’t solely reliant on Chinese consumers. It has been exporting EVs to Europe for about two years, but that market is also seeing increasing competition, including from major global automakers adding EV models to their lineups.

China and Europe are the largest auto markets in the world, though. So there remains opportunity in the long term. If Nio can offer a popular, mass market EV, its path to profitability will be clearer. Investors that want to bet on that success could take advantage of the recent share decline. But it may be smart to buy in thirds rather than risking all your investment capital at once.

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Howard Smith has positions in BYD, Nio, Tesla, and XPeng. The Motley Fool has positions in and recommends BYD, Nio, and Tesla. The Motley Fool has a disclosure policy.

Is Nio Stock a Buy? was originally published by The Motley Fool