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At $10, are volatile NIO shares worth the risk?

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.

NIO (NYSE:NIO) shares have tanked in recent weeks, before staging something of a recovery on Friday. The Chinese EV manufacturer is among the most promising rivals to Tesla. But it’s been a tough year for Chinese hard tech. So, at $10, is NIO a buy?

What’s behind the fall?

NIO shares are down 75% over 12 months, and down 20% over one month. Clearly, investors, won’t be happy.

The share price tanked in early 2022, having surged during the pandemic. The year started with a tech sell-off, prompted by a surge in US Treasury yields, which impacted growth stocks more as they are valued on future revenue expectations.

But that wasn’t the end of it. Chinese Covid policy impacted production, putting additional pressure on the share price. And this continues to be an issue.

More broadly, there are concerns about the health of the Chinese economy, compounded by Xi Jinping’s new cabinet — formed entirely of loyalists signalling a further step away from democracy and towards autocracy.

Valuation and profitability

As the share price has fallen, metrics such as the price-to-sales (P/S) ratio have become increasingly attractive. The firm now trades with a P/S around three, far less than Tesla at 10.

However, the firm is still loss-making. On Thursday, the firm reported a bigger quarterly loss due to a jump in costs, but said it expects deliveries to almost double in the current quarter.

This year, with output growth slowing in the first three quarters, it seems that NIO might have taken a step back on the path to profitability. Projections suggest that profitability may not come until late 2024 or 2025 now.

Reasons for optimism

I’m optimistic on this firm’s outlook primarily because of the strength of its offering. NIO has an exceptional range of vehicles, and they’re priced competitively versus US and European counterparts. The company is also utilising the latest technology, including battery-swapping technology that allows users to change their empty batteries for full ones in a matter of minutes.

The Shanghai-based company also has seven cars on offer — and this is particularly important as choice is normally positive for generating sales. By comparison, Li Auto only has two cars — albeit very impressive ones — in production.

It’s also worth noting that NIO’s EVs matched up well against its US peers. Several NIO vehicles beat their Tesla counterparts on range — but not speed. NIO is also packing its vehicles full of gadgets, including voice-activated window and boot opening.

There’s also the matter of Chinese Covid policy. It was relaxed yesterday. But ultimately, I think the policy will be scrapped all together.

Will I buy NIO stock?

I actually bought NIO at around $13 earlier in the year, although the pound was stronger back then so in GBP terms, the share price is pretty similar right now. I could have sold around $24 in the summer, but preferred to play the longer game.

Now, with the stock trading around $10, I’m buying more despite the weakness of the pound. I really can see NIO becoming a household name one day.

The post At $10, are volatile NIO shares worth the risk? appeared first on The Motley Fool UK.

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James Fox has positions in Nio Inc. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022