Investing in the electric vehicle sector has proved to be the right move for those looking to invest in the next big thing, at least in stalwart companies like Tesla (NASDAQ:TSLA) or BYD Co. (OTCMKTS:BYDDF) over the long-term. Unfortunately for growth investors, companies like Nio (NYSE:NIO) have underperformed. There’s no way around that reality.
After surging from a low of around $1.50 per share in 2019, shares of NIO stock rocketed to an all-time high of more than $62 per share in early 2021. Today, shares of NIO stock now fetch less than $5 each, at the time of writing.
Having almost entirely round-tripped in the matter of just a few years, the question is whether Nio is worth buying at current levels, or if this downward momentum will continue. Let’s dive into the company’s challenges, and if we can make a value case for this embattled Chinese EV maker.
Mizuho Downgrades NIO
Wall Street analysts currently appear to be taking the “under” in terms of Nio’s potential right now. A recent downgrade from Vijay Rakesh, a Mizuho Securities analyst, has pegged NIO stock’s value at $5.50 over the next year. That’s a rather concerning price target, implying insignificant upside from current levels.
This downgrade negatively affected the stock, which has seen little reprieve over the past week. In fact, NIO stock has dipped from more than $5 per share five trading days ago to below $4.80 at the time of writing. It’s a trend many bulls are hoping will stop.
The thing is, near-term EV demand challenges, as well as Nio-specific liquidity issues, are driving this bearish view. Until the company can resolve its cash bleed, and the EV market recovers in terms of its forward demand forecasts, it appears more price target cuts may be in order.
NIO is Underperforming in the EV Sector
In its recent earnings report, Nio disappointed investors by showing 17.10 billion yuan in revenue, which was below expectations. With cash reserves of 57.3 billion yuan, and further capital expenditure expected, the cash bleed story remains a key thorn in the side of Nio investors.
That’s especially true, after CEO William Li announced the new ET9 model. More capital will be needed to fund production, and the company just isn’t earning enough to cover its working capital costs.
Despite a reduced net loss and 4.6% year-over-year sales growth, Nio’s valuation multiple remains competitive, potentially attracting investor interest. That’s the upside with this stock – it’s cheap.
But with more major product launches this year, it’s clear the narrative will remain bearish, until the company can produce significant earnings growth. It’s a bottom-up market right now, with most investors focusing on earnings over revenue growth. For a company like Nio, that’s not a great thing.
Price wars and increased competition from Tesla in the SUV market Nio is shooting for also doesn’t bode well for the company’s near-term prospects. While Nio has been collaborating on battery swap technology with Chinese partners, this fact has done little to stop the pain of lower share prices being pushed by the market.
Better Avoid or Sell NIO
NIO’s recent earnings report leaves room for interpretation. Despite growth, it remains unprofitable with substantial losses: $776.4 million in the last quarter and $2.9bn annually.
While Tesla took 18 years to turn a profit, Nio is a much younger competitor. So, maybe there’s some value-based approach bulls can hang onto, particularly with the stock trading at current levels.
The thing is, rising competition for lower-cost alternatives in the markets Nio is operating in is killing margins. Chinese competitors like BYD offer more affordable (and in some respects, better) EV options, halting Nio’s progress.
Concerns around Chinese EV demand has also hit all stocks in this sector, though disproportionately affecting Nio. Until something changes, I think the stock remains a sell.
On the date of publication, Chris MacDonald did not have (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.