Think of electric vehicles and often the first name that springs to mind is Tesla. But Tesla is far from the only company building electric cars. Established automakers like Ford and Toyota are pushing their electric vehicles, as well as newer companies like NIO (NYSE: NIO).
Nio stock is down 8% over the past five years. In the past year alone, it has more than halved and now sells for under $10 apiece.
Is it crazy to imagine it ever getting to $100 per share? If not, should I invest now?
Frontier markets
The idea of a share increasing more than tenfold sounds improbable.
But it does happen. NIO’s rival Tesla has increased by over 800% in the past five years. At points in its history, Tesla shares have shown a return much greater than tenfold.
In fact, NIO itself has risen much more than tenfold at points in its history. In October 2019, I could have bought its shares for under $2 each. Less than two years later, they were selling for more than 30 times that much.
Electric vehicles are still a frontier market. Ultimate demand is unclear as are the economics of the business. Many investors believe there could be big money to be made in this market, but are unclear which companies will make it. Accordingly, NIO stock has swung wildly in recent years. I think it could do so again in future.
Possible upward price drivers
That could mean it goes above $100, although the shares might go in the other direction too.
Looking at Tesla’a track record, several things seem to explain a lot of its share price performance. One is strong sales growth. In the past five years, Tesla’s revenues grew almost eightfold. I think strong revenue growth matters because carmaking is a scale game. It costs a lot of money to set up production and distribution chains, so ultimately, large sales revenues are necessary just to cover the costs.
Another factor is profitability. Tesla was loss-making for many years but has now made a profit for three years in a row, hitting $13bn last year. If it can consolidate its strong lead in the industry and use the pricing power of its brand, Tesla could increase profits substantially in future. I think expectation of that is what has driven up its share price over the years.
What might such factors mean for NIO stock?
Revenue was $7bn last year. That is a fraction of what Tesla managed, but the rate of growth is strong. NIO revenues have grown around tenfold in four years. It has been consistently loss-making, though. Last year the firm lost $2bn.
Where now?
So although in principle I think NIO stock could rise like Tesla’s did in the past, hitting $100, I do not see any short-term drivers for that to happen.
First I think NIO will need to maintain strong revenue growth and demonstrate a clear path to profitability.
I think that the NIO stock price could hit $100 in the medium- to long-term, if it shows the right progress. But for now I still see its competitive advantage as far less defined than Tesla’s. That matters a lot given how competitive the electric vehicle space is becoming. So, for now, I will not be investing.
