Anyone who invested £10k in Tesla shares around 12 years ago would be sitting on over £1m today. Yet the market cap of NIO (NYSE: NIO), dubbed the ‘Tesla of China’, is still tiny compared to that of its US rival. So, could investing in NIO stock at $7 make me similarly massive returns?
Obviously, the first thing to consider is how much money I’d have to invest in the stock.
If I were to invest £10k, then the share price would have to do something truly extraordinary to go on and generate me a seven-figure sum. It would have to go up 100 times in value.
While possible, it’s still very unlikely. In fact, according to CNBC on 8 November, only six stocks in the S&P 500 are 100-baggers or more in the last 20 years. Monster Beverage tops the list.
Now, NIO isn’t in the S&P 500, but this still shows how rare it is.
However, a £25k investment would mean the stock would ‘only’ have to go up 40 times to get me to £1m.
Again, not likely, I’d say. But slightly more plausible.
Market cap fantasy
NIO’s current market cap is $12.3bn. If it were to increase 40 times in value, it would become $492bn. Such a size would place it among the largest and most important companies in the world.
Is that likely to happen?
Well, NIO posted a net loss of $835m in the second quarter. That equated to a loss of $35,000 for each electric vehicle (EV) it sold.
I highly doubt its market value will explode higher while it’s still posting such hefty losses.
Indeed, it may need more cash again soon. It had $4.3bn in cash and cash equivalents at the end of June, but was still investing aggressively on research and battery-swapping stations.
Profits are needed
Just like Tesla did, NIO needs to turn profitable.
Unfortunately, though, that doesn’t look likely anytime soon. Vehicle margin was 6.2% in Q2 this year, compared with 16.7% in Q2 last year.
And it has now entered the vicious EV price war in China, which is likely to put more pressure on its already strained profit margins.
Even before the price war, most analysts weren’t expecting the company to reach a break-even point before 2025. It could be longer now.
A global company?
According to Reuters, NIO ranks ninth by EV and hybrid sales volume in China. But to grow into a much larger company, it’s going to have to become truly global.
Now, the firm did launch in Norway in 2021 and has since entered other European markets. And it is reportedly considering building a dealer network across Europe, where EVs sell for higher prices than in China. This could speed up sales growth, helping improve its profitability.
However, I note that NIO’s president Qin Lihong admitted in September that overseas sales have not met expectations. And the firm has since cut 10% of its workforce, alluding to a “gap between our overall performance and expectations“.
Also worrying, the European Commission is considering imposing tariffs to protect EU carmakers from state-subsidised Chinese EVs. That could immediately put a handbrake on NIO’s international growth.
Given all this, I doubt NIO stock is a millionaire-maker at $7.
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
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Ben McPoland has positions in Tesla. The Motley Fool UK has recommended Monster Beverage and 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.
(The post is shared from syndication feed, it is not edited by Analyzing Market Team.)