Chinese electric vehicle (EV) maker Nio (NYSE:NIO) seems like it should be doing better than it is. Sales are growing, it’s developing new, specialized chips for its cars and it has an innovative battery-swap business that it might just spin off into a stand-alone company. In China’s fast-growing EV market, that should spell success — but it’s not.
Nio also produces massive losses on every single EV it builds. It’s had to cut prices, skip out on entering the U.S. market due to trade restrictions and eliminate jobs to conserve costs. Those factors weigh more heavily on the stock. Shares are down 8% in 2023 and by nearly half from its 52-week high.
Investors need to decide whether the Chinese EV maker can overcome the headwinds it faces or if the risks are just too great to invest in NIO stock.
NIO Details
Nio delivered 55,432 vehicles in the third quarter, up 75% from last year and 135% greater than in the second quarter. That generated a 47% growth spurt in year-over-year revenue, which hit $2.6 billion for the period. Unfortunately, adjusted losses widened to $664 million. The adjusted loss of $0.31 per share, however, handily beat Wall Street’s expectations of a $0.43 per share loss. Earlier this year, The New York Times reported that Nio was losing about $35,000 on each car. It was able to stay afloat only due to subsidies from the Chinese government totaling some $2.6 billion over the past few years.
Now Nio just got another cash infusion of $2.2 billion from the sovereign investment fund of the United Arab Emirates called CYVN Holdings. That’s on top of the $1 billion it got from the fund this summer.
The Middle East is shaping up to be an important stronghold for EV manufacturers and a key lifeline for survival. Lucid (NASDAQ:LCID) is majority-owned by the Saudi Arabian government’s Public Investment Fund, which owns 60% of the EV company. For Nio, it withdrew plans to enter the U.S. market as trade tensions between the U.S. and China ramped up. It is looking to other foreign markets for growth. Europe and the Middle East are key target markets.
Now What?
Despite fast-growing sales, building EVs is expensive and, for many automakers, not profitable. While Warren Buffett’s preferred Chinese EV maker BYD (OTCMKTS:BYDDF) reported first-half 2023 profits of $1.5 billion, others are having a rougher go of it.
Yet, as competitive as the Chinese EV market is, support from Beijing and Abu Dhabi suggests Nio will not go under. Part of Lucid’s investment thesis seems to be Riyadh will buy out the company before allowing it to go bankrupt. It may be the same for Nio.
Still, Nio does have some things going for it. The battery-swap business could be a growth business on its own. Its battery-as-a-service subscription could convince potential EV buyers concerned about long charge times for EVs to purchase one. The company would know it could readily swap out a battery in just 3 minutes. By spinning it off, Nio is showing its intent to be profitable sooner rather than later.
As I’ve mentioned elsewhere, I’m leery of recommending Chinese stocks because of Beijing’s capriciousness. However, I tend to be more accepting of an investment in Nio. It is quickly growing sales and has support from strategic investors, government-backed though they may be. I wouldn’t take a large stake in Nio, though. Instead, a small investment would allow you to participate in the potential growth and development of a unique EV maker.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
