Image source: Sam Robson, The Motley Fool UK
I’ve recently been searching for a turnaround stock for my ISA portfolio. And NIO (NYSE: NIO) has caught my eye, given that the stock is down almost 20% for the year.
Over four years, it’s crashed 92% and now trades for just $3.50!
NIO has a perennial problem
Founded in 2014, NIO is a Chinese electric vehicle (EV) manufacturer that focuses on the premium segment, particularly SUVs and sedans.
However, what sets it apart are its battery-swap stations, where drivers can exchange a battery in a few minutes rather than charging it. NIO operates approximately 3,354 of these stations, with the vast majority in China.
The company used to be dubbed the ‘Tesla of China’. But that moniker isn’t used anymore, as it has never turned a profit and its $7.3bn market cap is a fraction of Tesla’s.
NIO’s consistent losses have always put me off investing. In 2024, the firm delivered 221,970 vehicles, up 38.7% year on year, generating revenue of $9bn (up 18%). Yet it still lost $3bn, almost the same amount as the year before.
In Q1, the firm lost another $930m, which was 30% more than the year before. However, CFO Stanley Yu Qu attempted to reassure investors: “Since the first quarter, we have implemented a range of cost control measures, including organisational restructuring, cross-brand integration, and efficiency improvements…Starting from the second quarter, the company aims to achieve structural improvements in overall cost efficiency.”
I got déjà vu reading that, because NIO has been saying such things for all the years I’ve been following it. Yet the losses keep coming, and the share price keeps falling ever lower.
A bruising price war
Another thing that puts me off is the brutal EV price war in China, NIO’s home market. This is showing no signs of abating, and EV giant BYD recently lowered prices even more on some models. Apparently the Chinese government is growing very concerned about the industry.
The price war is like an anaconda, constricting profit margins. In such an environment, I doubt that NIO has any real pricing power.
That said, it has launched a couple of cheaper sub-brands to appeal to different customers. ONVO is a family-oriented one, and Firefly is a smaller high-end EV. Perhaps these can stand out in an increasingly crowded Chinese EV market.
My move
Analysts currently forecast a 35% increase in revenue this year. While that’s impressive at first glance, the losses are going to continue for years to come, according to the same forecasts.
Obviously, we can’t assign NIO stock a P/E ratio as there are no earnings. On a price-to-sales basis, the multiple is just 0.75 times.
That could prove to be a generational bargain if there’s a ceasefire in China’s EV war, NIO’s new brands sell like hotcakes, and it finally turns a profit.
However, there are too many ifs there for me. And with just $3.6bn in cash and equivalents at the end of Q1, I fear the company will soon need yet another injection of capital to keep the factory lights on.
Weighing things up, I’m no more bullish on NIO at $3.50 than I was at $10. So I’ll keep looking for that potential turnaround stock elsewhere.
