Over the past year, electric car maker NIO (NYSE: NIO) has lost 59% of its value. But the company still has a market capitalisation in excess of £20bn. So, despite the fall in the NIO share price, at least some investors apparently remain confident in its investment case. Should I join them and add the company to my portfolio?
The NIO investment case
NIO is a young company but it has been growing fast. Last year, revenues more than doubled to £4.5bn. That was not enough to stop the company reporting a heavy loss, of more than half a billion pounds. But the encouraging news is that the loss in the past couple of years, although still huge, is markedly smaller than it used to be. As the company ramps up production and achieves greater economies of scale, losses could shrink further and the company may even start turning a profit.
The costs of designing, developing, manufacturing, and selling electric cars are immense. But once the initial capital costs are out of the way, an electric vehicle’s cost base ought to fall. At that point, if it can make its cars attractive enough for buyers, the company’s profit model could become profitable. That is the approach taken by industry pioneers such as Tesla. It could mean NIO’s profitability improves over time.
NIO has also introduced an innovative approach to vehicle battery swapping. That may offer a solution to one of the factors limiting adoption of electric vehicles in many cases, which is the limited battery life and range some of them have.
The road ahead
However, as we have seen over many years at Tesla, growing an electric vehicle company can be challenging. While demand for electric vehicles is set to increase a lot, NIO is only one player in an increasingly crowded field.
As well as startup electric vehicle specialists, many established car makers like Ford and General Motors have grand plans to ramp up electric vehicle production. Given their deep experience of car manufacturing, sales, and servicing, I think they may be better positioned than the likes of NIO or Tesla to win the lion’s share of the electric vehicle mass market in the long term.
The NIO share price has also been suffering lately due to concerns about growing lockdowns in its home market of China, which could hurt both production and sales. I do not think that is very significant to the long-term investment case. Tesla went through lockdowns in the US and indeed one of its biggest factories is also in China.
My next move on the NIO share price
But while the short-term pandemic impacts do not concern me, the longer-term business model does.
So far, neither NIO nor any of its competitors has proven that it has a business model that can make healthy profits on a sustained basis without government subsidies. As the market gets more crowded, that could add price competition, hurting profit margins. On top of that, NIO is competing against a host of established car companies both in China and elsewhere.
For those reasons, despite a falling NIO share price, I will not be adding it to my portfolio.
