Nio (NYSE:NIO) is facing rapidly increasing competition. Meanwhile, the company’s margins are also being pressured by an accelerating price war in the Chinese electric vehicle (EV) market. But that’s not all. Nio’s addressable market is quite limited and the firm lacks strong competitive advantages. Given all of these points, I believe investors are best off unloading their NIO stock while they still can.
Looking forward, I don’t expect shares of this EV maker to outperform the market over the next two years. So, what can investors expect? Let’s take a look at why investors should consider avoiding Nio — and what NIO stock may look like by 2025.
NIO Stock: Increasing Competition and Price Wars
First off, it’s clear that Nio is facing increasing competition. Just this month at the Shanghai Auto Show, Nissan (OTCMKTS:NSANY) unveiled a new electric SUV called the Arizon. Other automakers like Volkswagen (OTCMKTS:VWAGY), Mercedes Benz (OTCMKTS:MBGYY) and BYD (OTCMKTS:BYDDY) also debuted EVs at the show. Given its very strong position in China, BYD’s new vehicles — from the Seagull to the Yangwang U9 supercar — could be especially problematic for China-based Nio.
Meanwhile, Tesla (NASDAQ:TSLA) has cut the prices of its higher-end EVs by between 16% and 23% since the beginning of the year. Those price reductions will likely pressure Nio’s vehicle sales. That’s especially true because the Chinese EV maker reportedly plans to refrain from reducing its own prices.
Of course, Nio’s reluctance to reduce prices is understandable. The company’s gross margin sank to just 10% in 2022, down from 18% in 2021.
A Lack of Strong Competitive Advantages
In the past, I have been upbeat about Nio’s innovative battery-swapping system, which allows drivers to quickly exchange their used batteries for fully charged ones. But now that Tesla’s Superchargers in China allow drivers to add 250 kilometers of range in 15 minutes, I’m not sure that Nio’s battery-swap program gives the EV maker much of an advantage.
Moreover, another one of Nio’s competitors, China-based EV startup Li Auto (NASDAQ:LI), is reportedly launching an “800-volt fast-charging system” that will enable its vehicles “to get 400 kilometers (roughly 250 miles) of range on a 10-minute charge.” Also worth mentioning is the fact that Li’s hybrid vehicles use gas to charge and extend the range of their batteries. As a result, Li drivers don’t have to worry as much about “range anxiety” as Nio drivers potentially do.
Finally, on the autonomous driving front, Nio reportedly offers Level 2. However, Mercedes was able to bring Level 3 autonomy to the U.S. this year. Meanwhile, China-based competitor Xpeng (NYSE:XPEV) is apparently “close to Level 3” and “could be ‘three years ahead of competitors.’”
Discouraging Stats and an Uninspiring Outlook
Unlike many other China-based EV makers whose sales rose in March versus February, Nio’s deliveries dropped almost 15% during the same period. The company is also lacking on the profitability side; operating income sank to -$2.27 billion last year from -$707 million in 2021.
Meanwhile, analysts on average expect Nio to continue to lose money through 2025. The mean estimate calls for the company’s EPS to fall to -$1.02 this year followed by -30 cents in 2024 and -3 cents in 2025.
Last, according to The Fly and in-line with my overall thesis on NIO stock, JPMorgan warned in early March that “Nio’s Q1 margin could trend down further while the magnitude of improvement from Q2 will be shy of Street expectations, considering the ‘challenging competition environment.’”
The Bottom Line on NIO Stock
Because Nio focuses on higher-end consumers in China, its total addressable market is already limited. On top of that, the company faces a great deal of competition that’s only growing and it lacks meaningful advantages. Meanwhile, margins sank last year and Nio underperformed its peers last month. Analysts expect Nio to remain unprofitable for years.
On the positive side of things, Nio has expanded to Europe, where it plans to offer much more affordable EVs. The trailing price-to-sales (P/S) ratio for NIO stock is a rather low 2.2X as well.
Still, it will probably take at least three years for European sales to move the needle for shares of this company. I also expect the EV maker to lose market share in China over the next two years.
In light of all of these points, my 2025 price target for NIO stock is only $11.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.