I think NIO stock could soar

Electric vehicles can move fast, without making a lot of noise. The same can sometimes be true for shares in their makers, like NIO (NYSE: NIO). While a lot of investor attention has been focussed on Tesla in recent years, NIO stock has had some dramatic price action of its own.

Right now, the carmaker’s shares are trading for just a fraction of their previous price. But I think they could do very well in the next several years.

So, should I invest now while the shares are in the doldrums?

Why I’m optimistic

I think the bull case for NIO stock is pretty straightforward.

We have seen dramatic growth in demand for electric vehicles over the past few years. But I think that is small beer compared to what is yet to come. Over the next decade I expect electrically powered cars to become the norm for new purchases in many markets.

Some makers should do well out of that, whether established auto giants like General Motors or electric vehicle specialists such as Tesla. But a lot will not, as tends to be the case in any rapidly growing industry that attracts hot competition.

I think NIO has a few things going strongly in its favour. Its brand is quite aspirational, arguably even more so than Tesla in some markets. That gives it pricing power.

NIO’s home turf is China, giving it not only a competitive cost base but also a massive domestic market. Being local could give NIO a home advantage over international competitors when it comes to things like building the charging infrastructure needed for its vehicles.

I also like NIO’s battery swapping feature. That solves a key problem many would-be electric vehicle purchasers worry about: range. Being able to swap batteries during a journey effectively solves that concern. In the long term I think other makers could offer the same benefit, although for now at least NIO has an advantage in this respect thanks to its battery swapping strategy.

Valuing NIO stock

So, I like the business prospects. But do I also like the valuation?

Here things get trickier. The $13bn market capitalisation may seem quite rich today, but if NIO continues to grow sales fast and proves it has a path to profitability, I think it could come to be seen as cheap. Volume carmakers have high setup costs, but once they ramp up volumes they can make large profits.

Last month, NIO’s sales were 31% higher than last April. That is strong growth and I think there is more to come, especially now that the Chinese economy is humming again after its long pandemic lockdowns.

NIO has consistently missed its ambitious sales volume targets. But it is still growing quickly and I believe that could push the shares up in the next couple of years, especially if it can trim its losses sharply (or even move into profit like rival Tesla has). I think that alone could see the shares soar.

But the cost base concerns me. NIO is burning cash and if that continues it may need to raise more capital by diluting existing shareholders.

For now, the risks mean I will not be investing in NIO stock despite the opportunities the firm has.