Owning Tesla (NASDAQ: TSLA) shares has been an incredible ride for many people. Yes, they are down 49% compared to a year ago. But they are still almost nine times more valuable now than they were five years ago. If I had bought the shares in the first few months of 2019, I would have increased my money tenfold. Rivals like NIO (NYSE: NIO) are nipping at Tesla’s heels. If I buy NIO stock today, might I be rewarded in the coming few years with the sort of performance we have seen at the American firm?
Sectoral development
One difference between Tesla then and NIO now is that the electric vehicle market is more developed today. In the first quarter of 2019, Tesla delivered 63,000 vehicles. Fast forward to the company’s most recent quarter and the number was 343,000 – growth of over 500%.
Tesla has proved that an electric vehicle specialist can consistently make and sell vehicles in large volumes. That has taken away some worries investors had about the ultimate viability of this business sector.
It also means that the investment case for Tesla and its sectoral peers like NIO can now be based on a more established understanding of the economics of large-scale electric vehicle production. That was much less clear in 2019. For that reason alone, I do not expect NIO stock to surge in coming years like Tesla did from 2019 onwards.
NIO has market opportunities
Tesla has also seen its profile benefit from having a well-known chief executive in the form of Elon Musk. He may be eccentric, but I do not think Tesla would have soared the way it has without Musk at the helm. The story is not just about the company’s leader though. The brand itself has quickly established itself as a desirable one for many drivers.
I do not expect NIO stock to see a similar boost thanks to charismatic leadership. But it could aim to build a desirable brand like Tesla has done. Its Chinese base could also give it an advantage both in terms of production cost and tapping into a huge domestic market.
NIO is only a fraction of Tesla’s size. But it delivered over 31,000 vehicles in its most recent quarter. Not only is that a substantial number, it is 30% higher than in the same quarter last year. This is now a sizeable, but still-fast-growing business. That could help support the NIO stock price, depending on how quickly it can convert sales into consistent profits. But that does not mean it will perform at the level Tesla did in recent years, as it lacks some of its peer’s advantages in that period.
My move
Tesla shares did well even while the company was loss-making. But I think the investor landscape is different now and expectations for electric vehicle businesses are more demanding thanks to Tesla’s trailblazing.
What concerns me most about NIO is that profitability question. In its most recent quarter, while those deliveries grew 30%, net losses nearly quintupled to $578m. Ongoing losses on a large scale bring the risk of a liquidity crunch leading to shareholder dilution.
For now I will not be buying NIO stock for my portfolio.
