Nio(NYSE: NIO) is a fast-growing company looking to capitalize on China's growing electric vehicle (EV) market. It has carved out a niche in the industry with its battery swap business.
However, the journey hasn't been without its challenges. Pricing wars have put pressure on margins, and the ongoing trade tensions in the U.S. and Europe weigh heavily on the business.
A few years ago, Nio was the talk of the town, with its stock soaring to $67, but today, it is trading at around $4 per share. While some may view the stock as a bargain, prospective investors should carefully weigh several factors before diving into shares of this EV stock.
Nio's unique selling proposition
Founded in 2014, Nio is an up-and-coming player in the EV market in China. With 160,038 sales a couple of years ago, Nio is China's fifth-largest pure EV brand with a 3% market share. For comparison, BYD Company made 1.3 million in sales, giving it a 25% market share, while Tesla sold 603,000 vehicles for an 11.7% market share.
One of the company's more interesting features is its battery swap business. This is part of Nio's broader battery-as-a-service (BaaS) offering, where customers can buy the car without a battery and pay a subscription fee for battery access, which includes battery swaps. This sets it apart from many competitors and addresses one of EV owners' primary headaches regarding charging times.
Image source: Getty Images.
Nio has a network of battery swap stations where drivers can quickly exchange their depleted batteries for fully recharged ones. With this battery swap technology, cars pull in, robotic systems swap the battery, and the driver doesn't even have to leave the vehicle.
This offering has a couple of advantages. First, swapping out the battery takes about five minutes, significantly faster than charging, which can take anywhere from 20 to 60 minutes. Second, users could upgrade their batteries as Nio develops them. The subscription is for 75 kilowatt-hour (kWh) or 100 kWh battery packs. In the last year, it has also made 150 kWh battery packs available to customers.
One downside to the BaaS model is that it has required a lot of upfront investment in battery inventory, stations, and maintenance. However, as Nio sells more vehicles, it hopes that the utilization of these battery swaps will increase, too. Analysts at Western Securities, a Chinese investment bank, think this part of Nio's business could break even by 2026.
The EV maker faces some serious headwinds
Last year was a record for Nio, as the company delivered 221,970 vehicles. The company held a strong position in the pure EV market, with a 40% market share for those vehicles selling over RMB 300,000 (approximately $41,359).
Its revenue was $9.1 billion, up 16% year over year. Its gross margin also improved from 5.5% to 9.9% but remains below where it was just a few years ago due to pricing wars among China EV makers. The company continues to lose money and posted negative earnings per share of $1.53.
William Li, founder and CEO of Nio, remains optimistic that the automaker will achieve profitability in the fourth quarter of 2025. The company plans to take aggressive cost-cutting measures and operational restructuring to reach profitability.
However, that could be more difficult given recent developments. During the company's earnings call on March 21, Li told investors that negative public sentiment has significantly impacted sales of its Onvo brand, with volumes coming in 30% to 40% lower than expected.
The company also faces pressure from geopolitical trade tensions. For example, the European Union approved tariffs on Chinese EVs last year. This came as the EU found that EV makers in China benefit from massive government subsidies, allowing them to undercut rival producers.
Additionally, the U.S. raised tariffs on Chinese EVs to 100% last year under former President Joe Biden. President Donald Trump has announced another 20% tariff on goods from China, and more could be on the way.
Is Nio a buy?
Nio is making progress and continues to grow its sales and top-line revenue. However, the company continues to struggle with operating losses, and slower sales of its Onvo brand could weigh on growth this year. While the company is taking some necessary cost-cutting measures, it remains to be seen if those will help it turn a profit in the fourth quarter this year as its CEO expects.
That said, the stock is relatively cheap and trades around 0.99 times sales compared to Tesla, which is priced at 9.95 times sales. More aggressive investors interested in building a position in the EV company could nibble on shares here. But it's important to understand that an investment in Nio is far from a sure thing, so size your position accordingly.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.
