Is NIO A Good Investment Right Now?

Chinese-owned NIO (NYSE: NIO) was one of the biggest winners on Wall Street in 2020, with shares up over 1,100% last year compared to the S&P 500's 16%. However, NIO stock has not been so fortunate in 2021 so far. Over the last six months, shares have only gained 11%.

With several innovative developments planned, many analysts believe there are more gains to come for NIO shareholders.

Growth opportunities and battery strategies

EV infrastructure in China is rapidly improving, which has encouraged even more car buyers to opt for electric models. Coupled with the Chinese government's new laws, which plan to prohibit the sale of gasoline-powered models by 2030, NIO stands to benefit as a home-grown company. Furthermore, experts predict that by as early as 2025, 16.5% of new cars sold in the country could be electric. This implies an overall 31% annual sales growth rate for the entire EV industry.

NIO's ability to maintain its position as a market leader in the "batteries as a service" (BaaS) business model will also be crucial. If NIO succeeds, it will obtain revenue from selling its motors to clients, leasing the batteries required for those cars, and then offering customers the opportunity to swap out their old batteries for newer ones. In fact, in Q1 NIO brought in RMB 576.5 million ($88 million) from its other sales category, up 395% year-over-year and an increase of 23.4% from Q4.

The company has successfully reduced swapping time down to only three minutes, which will hopefully encourage busy drivers to buy a new battery instead of waiting for one to be charged which will also eliminate range anxiety. NIO hopes to do this by eventually having battery switching stations in all major cities in China. Currently, NIO has 193 battery-changing stations in China.

The company's BaaS strategy of encouraging clients to sign-up for five-year battery leases in return for lower cost-per-year means locks customers into NIO's ecosystem for the entire lease term.

NIO's challenges

At the start of the year, NIO's competitor Tesla (NASDAQ: TSLA) began delivering its Model Y in China, cementing its position as the company's biggest competitor in the Asian market. Tesla's growing popularity in this region is worrying for NIO, especially as CEO Elon Musk has slashed the prices of Tesla's models several times in 2020 as production costs were lowered. However, it is not yet clear if the Chinese government will allow Tesla to move too far ahead of NIO, as it's been evident that officials prefer to help home-grown companies over foreign competitors. In early January, NIO also stood up to its rival by launching its new sedan ET7.

The luxury carmaker is still not profitable though. In the first quarter of the year, NIO's revenue totaled RMB 7.982 billion ($1.2 billion), an increase of 481.8% YoY, which will help the company inch closer to breaking even. In Q1, the EV manufacturer delivered 20,060 vehicles, up 15% from the fourth quarter.

As NIO gets closer to reaching a cash-flow positive state, margin expansion will be very important. Gross margin was 19.5% in Q1, compared with -17.2% in the fourth quarter.

Is NIO stock a buy?

Even though some people view NIO shares as overvalued, no one can argue that it is set to make its mark on the EV industry. With revenue growing alongside a rising market in China, its stock should be watched carefully.

NIO is set to benefit hugely from government policies made to phase out gas-powered vehicles in the coming years in China and across the globe, alongside heightened interest from environmentally conscious consumers.

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Is NIO A Good Investment Right Now?

Growth opportunities and battery strategies

NIO's challenges

Is NIO stock a buy?

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