Electric vehicle shares have been highly rewarding for some investors. If I had invested in Tesla five years ago, I would have seen my money grow more than nine times over.
Even better returns were made between 2019 and 2021 by some shareholders in rival carmaker NIO (NYSE: NIO). But NIO stock has since fallen a long way. With a share price below $10 versus a 2021 high of over $60, could NIO now be a bargain buy for my portfolio?
Runners and riders
I think most people agree that the electric vehicle market – which is already substantial – is likely to see strong growth in coming years. Estimates vary but even at the low end of the spectrum, it is hard to imagine that the electric vehicle market size a decade from now will not be hundreds of billions of pounds, or more. Tesla alone generated revenues of $81bn last year.
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But what is less clear, as with any emerging industry, is the likely scale and division of profitability. Some industries grow large but are not necessarily highly profitable. Strong competition can push down profit margins. I think there is already evidence this is happening in the increasingly crowded electric vehicle space, with Tesla cutting prices on many cars this year.
There is also the question of how the industry’s profits will be divided. Will there be a large group of companies that can eke out some profit, as in sectors like property and food production? Or will the electric vehicle industry develop as the car industry did in the twentieth century, with hundreds of local companies giving way to a small number of global giants that have the economies of scale required to make big profits?
Is NIO an outlier?
So far the answers to those key questions remain unclear, in my opinion. But in principle, I think the possible answers are clear enough to let me invest in the industry. Tesla is already profitable and has a range of competitive advantages. Its current share price does not attract me, but at the right price I would consider adding Tesla to my portfolio even while the industry continues to evolve.
What about NIO?
NIO has advantages, from its premium brand positioning to strength in potentially large markets such as China. Its battery swapping network also sets it apart from Tesla.
However, is NIO an industry outlier or is it still just in a pack of companies racing to scale up electric vehicle production? Revenues last year were less than a tenth of Tesla’s, at $7bn. The company remains heavily loss-making, with red ink of $2.1bn last year.
Not an obvious bargain
For now, I do not see NIO as a great business. It may turn into one, but I think that remains to be proven.
So, although NIO stock is selling at under $10, that on its own does not make it a bargain.
For it to be a bargain for my portfolio, I need to feel that the price is markedly below what I see as the firm’s long-term value. I feel that long-term value remains impossible to judge, so will not be buying NIO stock any time soon.
