Sun. Jul 14th, 2024

Should I buy Nio stock now that it’s under $5?

By Vaseline May30,2024

Futuristic front of NIO car in Norwegian showroom

Image source: Sam Robson, The Motley Fool UK

It has been a difficult year for investors Nio (NYSE: NIO), with shares now down 41% from where they started in 2024. Still, Nio shares are 62% higher than five years ago.

The price has recently fallen below $5, a price last seen four years ago – shortly before it rose above $60.

So could the current price weakness present a buying opportunity for my ISA? After all, I can buy US-listed companies in my stocks and shares ISA and Nio has piqued my interest for some time.

Good position in a promising market

Nio is one of many manufacturers of electric vehicles. That’s both good and bad, I think. Such a competitive field suggests that there is a lot of promise, which is why entrepreneurs have rushed to create car manufacturers.

The demand for electric vehicles is already high and is expected to continue to rise for some time to come. Nio has a number of things that help him stand out in this crowded field. For example, its patented battery swapping technology is an elegant but unusual solution to a common obstacle faced by electric vehicle drivers: limited range on a single charge.

But that crowded market could also put pressure on profit margins across the sector.

This is more than a purely theoretical risk. It’s one that has already materialized and I think explains some of the negative sentiment towards the sector in recent months.

The stock isn’t the only stock to have tumbled so far in 2024. Tesla has also fallen, albeit by a more modest 29%.

Lots to prove

I think the declining share price also reflects some company-specific challenges. One of them is scale. It produces thousands of cars per month. Last month, for example, 15,620 vehicles were delivered. That’s an increase of 135% compared to the same month last year.

But that still leaves Nio far behind Tesla and established manufacturers such as Toyota. That means it can’t achieve the same economies of scale that they can, which hurts its potential profitability. Making cars is a capital-intensive industry that consumes huge amounts of money. Being able to spread these expenses over high sales volumes is therefore an important part of a successful business model.

Meanwhile, the company’s economics continue to look unconvincing. The company’s net loss grew 44% last year to just under $3 billion. That’s a lot of red ink to be spilled.

Just wait

So while I like the company and think it has real potential, I also think the business model has yet to prove itself. Not only is the automaker making losses, but its bottom line is moving in the wrong direction as growth continues.

That could change if sales volumes continue to grow and Nio can achieve greater economies of scale.

But for now it remains to be seen whether that will happen. So even below $5 each, the shares can’t tempt me for a while.

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