Image source: Sam Robson, The Motley Fool UK
When it comes to electric vehicle makers, a lot of investor attention goes to Tesla. But Tesla is far from the only game in town. Rival Nio (NYSE: NIO) may sell far fewer vehicles, but it is growing, has an attractive brand positioning and uses battery swapping technology that helps set it apart from competitors, including Tesla. So, how would an investor have done investing £2,000 into NIO stock five years ago?
Modest return and a very bumpy road
The answer is that they would now be in the money, albeit on a modest scale. Around £200 on a £2k investment, to be specific.
Over the past five years, NIO stock has risen 10%. That compares to a 651% leap for Tesla stock in the same period.
As NIO does not pay a dividend, that 10% would be the total return over the past five years.
Given how the wider market has performed during that period, 10% does not seem particularly exciting to me.
Still, the road has been a bumpy one. Investing five years ago and selling less than one year later, in January 2021, an investor could have achieved a remarkable 1,526% increase in value. But someone buying the shares from that investor at that point would now be sitting on a 93% paper loss.
It is difficult to value fast-growing, loss-making companies
Why has NIO stock proven so volatile?
I think this is a classic example of a growth share in an emerging industry that investors struggle to value.
From the bullish side, NIO has a lot going for it. While Tesla’s (much larger) sales volumes fell slightly last year, NIO grew its own sales volumes 39% year on year.
2024 ended on a high, with December deliveries showing a 73% year-on-year increase. Last month was still very positive but year-on-year growth fell back to a more modest 38%.
NIO, like Tesla, has established a premium brand. Its battery swapping technology also offers a solution to a common problem that irks electric vehicle drivers: limited range.
On the bearish side, though, that range problem is arguably going away of its own accord as battery technology improves. So NIO’s battery swapping could end up being a costly solution to what anyway becomes a non-problem.
Despite strong sales growth, NIO is still far behind rivals like Tesla and BYD, meaning it lacks economies of scale.
In its most recently reported quarter, the company lost around $721m. For the same three-month period, Tesla reported net income of $2.2bn.
I can’t yet invest with confidence
That helps explain why Tesla has a market capitalisation of $1.2trn, against $8bn for NIO.
I do find a lot of the bull case for NIO quite persuasive. Over time, if the business keeps growing, develops better economies of scale, and can prove a pathway to profitability, I think NIO stock could move up — perhaps a lot — from today’s level.
But, just as I was not ready to invest five years ago, nor am I today.
I want to feel more confident that (like Tesla) NIO can make a profit on a sustained basis, before I consider investing.
