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NIO Stock Analysis: Is the Risky Chinese EV Maker Worth a Speculative Buy?

Nio (NASDAQ:NIO) has had a very bumpy road over the past five years. The company launched its IPO in 2018 at $6.28 and peaked out at $62.84 in 2021. That incredible move led to NIO stock reaching an enterprise value of $91.4 billion, which was about 16 times its 2021 sales at the time.

Fast forward a year later, and NIO stock has faced significant headwinds. The stock now trades around $6 per share after Nio reported a net loss of $624.6 million in the previous quarter. This clearly shocked investors, as the company also announced a plan to create a spin-off in its current battery production unit. While many may think this move could be a positive in terms of allowing the market to realize Nio’s full potential, it’s a move that has also raised concerns about supply chain control. 

Additionally, Nio’s fortunes are obviously tied to China’s economic health, a key factor that has impacted its overall stock performance. Once seen as Tesla’s (NASDAQ:TSLA) Chinese challenger, Nio is clearly trending lower.

For value investors, the question now is whether this high-growth stock is worth buying at these depressed levels. After all, the best time to buy long-duration assets is when no one else wants to own them. Let’s dive in.

Challenges Now and Ahead

As the company offers electric sedans and SUVs at prices starting at $46,000, NIO has seen impressive growth delivery in recent years. However, supply chain issues and market pressures are making the company and its investors worry, as it has been leading them to slower deliveries. It also has reduced vehicle margins, which came from 20.1% down to 11% in the third quarter last year.

Amid these challenges, the company decided to expand its battery-swapping station network, which was what stands out in outfit vehicle models. Despite being different from its competitors in the market, this also caused more costs and has contributed to more operating losses.

While Nio’s challenges deepened as Tesla, it also hinted at sustained slow growth with aggressive price cuts. Despite having a $2.2 billion recent investment, Nio’s high losses are very impactful, and will surely lead to a further stock decline in the next months.

Plans to Be Profitable

Nio might be able to stabilize its deliveries and margins as this benefits from different economies of scale. Improved United States and China relations will be key to such a move, as stabilizing global markets can align this company’s valuation closely to Tesla’s once again. 

Moreover, if NIO trades 6 times its sales and can be able to maintain a CAGR of 12%, the company could potentially be a part of the trillion company club in 2050. That may be a stretch, but for the perma-bulls in this sector in 2021, that was the overwhelming narrative, given the demographic fundamentals driving the Chinese EV market.

Nio is a company that seems up for the challenge, though risks certainly remain. Nio’s sustained growth in a competitive market is uncertain, and intense competition is heating up in the Chinese market. While these risks can be discouraging, I think any sort of accelerated delivery growth numbers could propel Nio into the global EV discussion once again. Currently, the stock is on the sidelines as investors focus on profitable names in this space.

NIO Stock Could Be a Speculative Buy

NIO’s growth is impressive, but concerns remain. China’s economic slowdown and US-China tensions may hinder domestic expansion and entry into the US market. Rising global interest rates also pose challenges for NIO’s substantial debt.

Despite apparent value based on sales and a return to growth, Nio remains a speculative pick given the company’s persistent losses and uncertainties in the Chinese market. Investors should consider this stock in line with their risk tolerance, but the bull case is easy to understand. It’s usually a good thing to buy a long-term holding when no one else wants to. That’s the case with Nio right now.

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.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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