While some trends may disappear after 2023, one that is unlikely to disappear is the increasing proportion of the world’s car fleet moving to electric vehicles (EVs). In the United States, EVs currently account for less than 10% of total vehicle sales. In China, the proportion is even higher, with battery electric vehicles (BEVs) accounting for 25% of new car sales in September 2023.
This makes China an important EV market for investors. Nioh (NYSE:NIO) This is a company that often comes up when you research EV companies in China. EVs are set to gain even more market share in 2024, but is Nio a good buy now?
Nio is not China’s largest EV producer
Nio is a popular Chinese EV investment for U.S. investors, but it is far from China’s largest EV maker.That title belongs to BYD (OTC: Baidi). In December, Nio delivered more than 18,000 of his vehicles, a 14% increase over the previous year. In 2023 he delivered more than 160,000 vehicles, an increase of 31%.
By comparison, BYD produced more than 3 million vehicles in 2023, with nearly 309,000 produced in December alone. So in terms of size, Nio is not even close to his BYD.
However, they both serve different markets. Nio focuses on the luxury segment while BYD offers more affordable EVs. As a result, Nio will never reach the same size as his BYD, but that doesn’t disqualify him as a potential investment.
However, it must be noted that the Chinese economy is not doing so well. This could pose a problem for his Nio if the driver wants a cheaper option instead of a more upscale option. It remains to be seen if this will affect his 2024, but it’s something to consider before taking a position at Nio.
Another consideration is financial aspects.
Nio is unprofitable and quickly runs out of cash.
Nio is a fast-growing company. Third-quarter sales increased 46% year-on-year to 17.4 billion yuan. However, there is no profit. Nio lost RMB 4.8 billion ($658 million) in business, which is far from breaking even. Nio, which has RMB 5.3 billion ($726 million) in cash on hand, is also at risk of running out of cash.
However, in mid-December 2023, Nio announced a $2.2 billion investment from US investment company CYVN. While this will temporarily strengthen Nio’s finances, the company is in a race against time to return to profitability.
The fourth quarter hasn’t been the best either. Nio had predicted he would deliver 47,000 to 49,000 vehicles, but exceeded expectations by delivering more than 50,000. But thanks to the price cuts, Nio’s revenue should have only increased by about 4% at the high end. While the delivery beat may increase growth rates, mid-single-digit revenue growth is not a great recipe for a company aiming to break even.
Nevertheless, Nio trades at a premium to China’s established EV player BYD.
Buying Nio instead of BYD doesn’t seem like a wise investment move, considering BYD increased its revenue by nearly 40% in the third quarter.
There’s a reason smart investment firms like it berkshire hathaway I own BYD stock, not Nio (Berkshire owns 8% of BYD). Investing in China is already difficult enough. Investors don’t have to add to the challenge by investing in startups in competitive industries.
Nio may have a great product, but its stock doesn’t seem worth the risk.
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Keithen Drury has no position in any stocks mentioned. The Motley Fool has positions in and recommends BYD and Nio. The Motley Fool has a disclosure policy.
Will Nio be a top EV stock in 2024? Originally published by The Motley Fool