The NIO (NYSE: NIO) share price was one of the hottest investments of 2020. The stock returned a staggering 1,440% throughout the year, outpacing the broader market by a wide margin.
Unfortunately, shares in the Chinese electric vehicle manufacturer failed to repeat this performance last year. The stock slumped 50% in 2021. This trend has continued in 2022. Even though the year is only a few weeks old, the NIO share price is down around 15%.
Shares in the company have been under pressure as the business has failed to live up to the market’s lofty growth expectations. The global semiconductor crisis has hit production, and competitors have been able to steal an edge over the enterprise.
However, heading further into 2022, there are several tailwinds behind the business that could help improve investor sentiment.
NIO share price catalyst
As I noted above, one of the main reasons why the stock has been under pressure over the past 12 months is its production, or rather the lack of it.
This started to change towards the end of the year. The company reported revenue growth of 116% for the third quarter as vehicle deliveries increased by 100% to just under 25,000 units. And thanks to growing economies of scale, the average profit margin achieved on each vehicle increased from 14.5% to 18%.
Alongside these results, the corporation did issue a warning to investors that growth would slow in the fourth quarter, although vehicle deliveries will still exceed 24,000, up 41% year-on-year.
To put these numbers into perspective, since the company began selling vehicles in June 2018, it has only sold 157,000 units. It wants to increase production to around 25,000 units a month by the second quarter of this year. That works out at 300,000 units per annum, more than three times the levels reported for 2021.
Of course, there is no guarantee that the business will be able to hit this target. It faces multiple challenges, including rising costs, the semiconductor crisis, and increasing competition from peers across China and the rest of the world. These challenges could weigh on output growth and the company’s profit margins over the next year.
Production growth
Still, if the enterprise manages to meet its elevated production targets, I think this could have a significant impact on the outlook for the NIO share price. The increased output will significantly impact the company’s bottom line and profit margins, providing capital for the business to reinvest and grow production further.
If it can rise to the challenge, the market potential for the enterprise is massive. The Chinese electric vehicle market was worth around $98bn in 2019 and is expected to grow at an annual rate of 31% until 2026.
As such, if the company can report strong output growth next year, I think the shares could reverse recent declines. If the firm hits this target, I will consider adding the business to my portfolio. Until it hits this landmark, I am happy to wait on the sidelines and see what happens.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
