Image source: Sam Robson, The Motley Fool UK
In the fast-growing electric vehicle (EV) landscape, NIO (NYSE: NIO) has emerged as a prominent player. As investors continue to seek the best opportunities in the expanding EV market, it stands out as a contender worth considering. With NIO stock down 53% in the last 12 months, is now the time for me to consider adding some shares to my portfolio? Let’s take a closer look.
Slowing revenue growth
NIO demonstrated impressive growth in its 2022 results, with revenues surpassing $6.5bn, a 37% year-on-year increase. This explosive growth highlighted its ability to capture an expanding share of the EV market. It was also advancing the company towards competing effectively with the incumbent players.
Fast forward to 2023, and the picture is notably different. For the first six months of 2024, revenues totalled just $990m. This was a sharp 24.9% decline from the second quarter of 2022. In addition to this, it marked a 22.1% drop from the first quarter of 2023. For me, the allure of the stock lay in its explosive growth. With that spark seemingly dimmed, the investment proposition seems much less appealing.
Thoughts on valuation
In the past NIO has been criticised for sporting a lofty valuation, rivalling its heavyweight competitor, Tesla. However, it seems that the tides have shifted. As things stand, the share price appears to offer enticing value in comparison to its industry peers.
NIO currently trades on a price-to-sales (P/S) multiple of two. This implies that investors price the stock at roughly double its annual revenue. Comparing this to close competitor Xpeng, which trades one a P/S multiple of five, indicates that NIO could be undervalued. The heavyweight market leader Tesla has a P/S ratio of 9, providing further support to this idea.
Wider concerns
The current macroeconomic climate doesn’t bode well for stocks like NIO, especially considering its main draw for investors is its high growth. This fast rise relies heavily on debt. This is a factor that looms large with the firm’s current substantial debt load exceeding $4bn on its balance sheet.
As inflation and interest rates remain high across the globe, having large amounts of debt like this could mean trouble for NIO. China, its home country, hasn’t been immune to these headwinds. Earlier this month one of its largest property developers, Country Garden, missed interest payments on dollar bonds sparking a wave of concern over the country’s economic health.
In light of NIO’s recent slowdown in revenue growth, a shifting valuation landscape, and broader economic concerns, for me, now isn’t the time to consider investing in this stock. The once-explosive growth seems to be slowing, with revenues already declining significantly in 2023.
While the valuation might appear tempting when compared to peers, the company’s heavy debt burden and the uncertain macroeconomic climate raise red flags. If it can deliver solid growth throughout the back half of 2023 I may reconsider my position. However, for now, I won’t be investing.
