Upmarket Chinese electric car maker NIO (NYSE: NIO) has seen its share price fall 30% from the $67 high recorded on 11 January. Despite this slump, NIO shares are still worth 235% more than they were a year ago.
This stock has certainly been a good investment over the last 12 months. But with sales of the firm’s luxury electric vehicles (EVs) continuing to rise, I’m wondering if the pullback we’ve seen this year is giving me a chance to buy NIO shares at an attractive price.
A flying start to 2021
NIO’s first-quarter results suggest demand for the company’s premium EVs remains strong in China. NIO delivered 20,060 cars during the first three months of 2021. That’s 16% more than it delivered during the last quarter of 2020.
Taking a step back, NIO’s growth seems even more impressive. During the 12 months to 31 March 2020, the company delivered 20,400 cars. During the following 12 months, it handed over 59,950 cars. That’s almost three times more.
Importantly, this business is becoming more profitable too. NIO reported a profit margin of 21.2% on the sale of each vehicle during the first quarter, up from 17.2% during the final quarter of last year.
The company’s improving performance seems to support broker forecasts which suggest the company could report its first after-tax profit next year.
NIO share price: perfect timing?
I don’t like investing in loss-making companies due to the extra risks involved. If a business isn’t making money, then it’s dependent on being able to find continued funding. If things don’t go to plan and funds dry up, then shareholders can face terrible losses.
However, I don’t think this is likely to happen to NIO. The company had $7.3bn of cash and short-term investments at the end of March, and is expected to become profitable next year.
Broker forecasts suggest sales should double to £3.9bn in 2021, then rise by 60% to £6.3bn in 2022. Based on these projections, NIO is expected to report an annual profit of about £15m in 2022, rising to around £425m in 2023.
These estimates price the stock at about 120 times 2023 forecast earnings. That’s far more than I’d normally pay. But NIO’s still a relatively small business in a fast-growing market. If it’s one of the big long-term winners in the EV market, then I think its growth streak could still have a long way to go.
My decision
NIO’s strong growth and improving profitability suggests to me that buying NIO shares at current levels might be a successful long-term investment.
However, history suggests that only a few of today’s EV start-ups will be big winners in this market. In my view, it’s too soon to know whether NIO will be one of them.
There’s also a second complication. NIO is a Chinese company with a listing on the US stock market. Over the last couple of weeks, there have been reports that China may tighten the restrictions on overseas listings of domestic businesses. Nothing has been confirmed yet, but I wonder if this could put pressure on NIO’s share price.
On balance, I see NIO shares as a speculative buy at current levels. However, I’d only invest a small part of my portfolio in this stock, in case things don’t go to plan.
