The NIO (NYSE:NIO) share price was last trading above $10 in the middle of September. Since then, it has struggled to make any kind of meaningful gains. Over the past year, the stock is now down 29%, trading just above $7. Here’s what I think we’d need to see to get the spark back into the electric vehicle (EV) manufacturer.
Growth around the world
Given the growth in the EV car market and the future outlook for the sector, some might be surprised by the lacklustre performance in NIO shares. Yet one of the key elements that has been hurting the share price is the lack of presence around the world.
Simply put, the business isn’t as diversified in terms of geographies as many other rivals. Aside from the Chinese market, it has started to sell in some Nordic countries since 2021. It looks like it could go live in the UK early next year. But that still leaves a large amount of the world without the ability to buy a NIO vehicle.
I think that we’d need to see validation of stronger sales ex-China over the next few months to get investors excited.
For example, vehicle sales revenue was down 24.9% in Q2 2023 versus the same quarter last year. This fall in revenue closely matches the fall in the share price. So in order to justify a circa 45% jump in the share price back to $10, I’d want to see a similar jump in sales revenue.
Progress towards breaking even
Another factor that will be key is profitability. Don’t get me wrong, I know that for a growth stock like NIO, the promise of profits in the future can justify a high share price now. Tesla successfully showed how an EV company can flip from a loss to a profit as it grew to reach scale.
NIO needs to start showing signs that it can be the next Tesla over the next year. At the moment, it’s hard to justify $10 given that it’s consistently posting quarterly losses.
The business outlook is for an increase in vehicle deliveries for Q3 by 74% versus Q3 2022. The higher number of vehicles will help the firm to get better economies of scale. It’ll help NIO to spread out the costs more and should get the business closer to posting a profit at some point.
From looking at the past share price performance versus previous losses, I’d say that pre-tax earnings would need to increase from the current quarterly level of -$859m to the smaller 2022 levels in the -$300m region. This progress towards shrinking the losses would give investors more confidence to buy. When the business had lower losses in 2022, it coincided with a share price comfortably above $10.
Although I wouldn’t suggest investors buy NIO stock right now, if the two above catalysts start to take shape, I feel there’s large potential for the long term.
