Key points
- NIO is underpinned by strong fundamentals
- Short-term issues impacting the share price should subside in the near future
- Impressive delivery growth suggests the company has further scope to expand in the long term
The electric vehicle (EV) sector has become rather crowded in recent years. NIO (NYSE: NIO), a Chinese EV automobile manufacturer, went public in September 2018 on the NYSE. Over the past year, the NIO share price has slumped by around 57%. This is due to a number of factors, like processing chip shortages. What I want to know, however, is whether the stock is ready to fly. Should I be adding NIO to my portfolio? Let’s take a closer look.
Fundamentals vs. competitors
A good barometer of the potential of growth stocks is the debt-to-equity (D/E) ratio. This is the relative proportion of equity and debt used for the purpose of financing the company. In NIO’s case, the D/E ratio is 0.8. This is higher than its American competitor, Tesla Motors, which has a D/E ratio of just 0.3.
This essentially means I view the NIO share price as a riskier investment, because more of its activities are financed by debt. On the other hand, if this aggressive strategy works, earnings can be extremely attractive because less equity has been issued in the process.
Indeed, we may gain more insight on the NIO share price by looking at its revenue per share data. Currently, the company generates $3.32 per share in revenue. This is significantly above another EV stock, Lucid Group, which only earns $0.0004 in revenue per share. As a more mature company, however, Tesla dwarfs both NIO and Lucid, with revenue per share of $35.95.
Wider influences on the NIO share price
NIO has evidently been working hard to maintain and increase delivery of its automobiles. In January 2022, the company delivered 9,652 cars. This represented an increase of 33.6% on a year-on-year basis. Compared with December 2021, however, there was a 7.9% decrease in output. This led the NIO share price to fall about 30%.
Nonetheless, deliveries over the longer term have been growing at pace. December 2021’s delivery number of 10,489 was up nearly 50% on a year-on-year basis. Indeed, this increase motivated HSBC to become more upbeat on this stock. Specifically, it raised its target for the NIO share price from $53 to $54. With the stock currently trading at about $24, this positive long-term trajectory is a reason why I think this stock could soon soar.
With growth stocks suffering on the prospect of the US Federal Reserve raising interest rates, the NIO share price has not been immune from the recent sell-off. This has been compounded by processing chip supply chain issues in August and October 2021. However, these problems are short term and should subside relatively quickly.
The future looks bright for this growth stock, in my opinion. Deliveries are promising and the fundamental aspects are attractive for this young company. I am confident that recent issues affecting the share price should retreat and clear the way for further expansion. I will be buying the stock during this current dip in the market.
The Motley Fool UK has recommended Tesla. 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.
