When it comes to investing in electric vehicles, a lot of attention is paid to Tesla. But other listed electric vehicle companies are also growing quickly. Take NIO (NYSE: NIO) as an example. The NIO stock price has fallen by more than half over the past year. But sales volumes are growing and the company expects a strong 2023.
Could NIO shares now present a possible bargain for my portfolio?
Strategic choices
I think the answer is a qualified yes, although the emphasis is on ‘possible’. Whether the current NIO stock price in fact turns out to be a bargain only time will tell.
A decision by the company’s management that recently came to light could help influence the long-term value of the company, in my view.
Tesla has been cutting its selling prices, in some cases aggressively. The aim of that is to push up sales volumes. That seems to be working: in the first quarter, Tesla sold 423,000 vehicles, which is an increase of 37% over the same period last year.
That is strong growth indeed. NIO managed 21%, from a much smaller base.
However, cutting prices to raise volumes typically leads to lower profit margins (although if sales volumes rise enough, absolute profits can still increase). It can also damage the prestige of a brand, hurting its long-term potential to command a price premium.
That may explain why the chief executive of NIO was quoted last week as saying, “We will certainly not join the price war”. That suggests that NIO’s strategy is to maintain its pricing, while seeking to bolster its value proposition through elements such as premium branding and customer service.
Economic impact
What might that mean for its business model – and the NIO stock price?
Tesla has been adding new production facilities. Running automotive factories and supply chains is massively expensive, even if they sit idle. Selling more vehicles, even at a reduced price, can help soak up some of the fixed costs. That was exactly the model that helped make steel magnate Andrew Carnegie one of the world’s richest men in his day.
But steel is a commodity. High-end electric vehicles are not.
Having pushed its prices down, Tesla may find it difficult to raise them again. It risks angering existing customers.
I prefer NIO’s strategy, of focussing on building a premium brand and helping customers understand why a car has the price tag it does. If it works and NIO becomes profitable, it might help the shares surge in coming years.
Wait and see
I also like other moves NIO is making to improve business performance, such as reducing the number of free battery swaps its customers can use each month.
But I see a risk here too: battery swapping is a key part of what currently sets NIO apart from rivals. It needs to be careful not to annoy its customers too much by undershooting their expectations.
I think the company’s strategic move on pricing could help the NIO stock price over the long term. But it still has a lot else to prove, not least that it can make a profit. I am warming up to the NIO investment case. But I am waiting for firmer evidence of a profitable business model before I consider investing.
