Electric vehicle maker Nio (NYSE:NIO) successfully established itself as a premium brand within the China market. It differentiated itself from rival EV companies by creating a battery-swap business to serve as an alternative to charging.

Yet vehicle margins are narrowing and NIO stock remains a loss-generating company. It is looking to sell its EVs in other markets and plans on introducing a mass-market car this year. Yet lower-priced cars could damage Nio’s reputation as a premium EV company, undermining the value of its existing lineup.

With NIO stock already down 44% in 2024 and off a staggering 92% from its 2021 high, is this a stock investors should plug into or just kick it to the curb?

Profits Ahead for NIO Stock

Nio delivered 160,038 vehicles in 2023, up almost 31% from last year, generating $7.8 billion in revenue. However, vehicle margins fell 420 basis points to 9.5% while gross margins tumbled 490 bps.

It reported an adjusted net loss of almost $2.6 billion, 51% greater than the prior year, suggesting Nio is still losing money on every car it sells.

Yet the situation is slowly changing for the better. Fourth-quarter vehicle margins, for example, were 11.9% compared to 6.8% a year ago. While that was because of lower material costs during the period compared to a year ago, it still missed management’s guidance of 15% margins.

Still, Nio’s senior vice president of finance Stanley Qu insists the EV maker will start seeing vehicle margins widen beginning in the second quarter this year when the company can begin achieving margins of 15% to 18%.

Investors should keep an eye on this to hold management to account if it doesn’t occur as expected.

Developing Mass-Market Appeal

Another area that could be a concern going forward is lower selling prices on its vehicles. Nio has a range of high-end EVs on the market but new mass-market vehicles will be coming out. The first one will be Nio’s new brand Alps.

It will compete against Tesla‘s (NASDAQ:TSLA) popular Model Y vehicle but Nio says it will have the battery-swap feature as a competitive edge. It will also sell for about 10% less than the Model Y. A second mass-market EV is also in the works but will be an SUV for a larger family.

The mix of vehicles Nio sells could broaden its appeal to buyers but could also serve to depress gross margins. It may also face steeper costs as it builds out its network of battery-swapping stations.

Nio says it wants to build over 4,000 swap stations worldwide by 2025, with about a quarter of them outside of China.

Management is still looking to produce 250,000 vehicles this year, double what it did in 2022. While higher deliveries can lead to better gross profits Nio still needs to translate the sales to its bottom line.

Go Time for Nio

Nio’s plans are ambitious. It is kicking production up several notches and is building out a full line of automobiles buyers can choose from.

There is even a third budget brand in development, the Firefly. Will too many low-priced options damage Nio’s upscale reputation? That remains to be seen, but other prestige brands have weakened their luxury appeal by going down-market. It is another point investors need to be mindful of.

Even so, Nio still needs to prove it can achieve these cost savings. Tesla builds almost 1 million vehicles in China, three-quarters of which are the Model Y. Nio says it will be beating the vehicle on price.

While the battery swap option does cut upfront costs on its EVs, Nio is building far fewer vehicles than Tesla so it misses out on economies of scale. The cost-savings may be difficult to actually achieve.

Building out the battery-as-a-service network is a massive undertaking and gives the EV maker something to truly differentiate itself from the competition.

The stock market, however, isn’t putting much stock into NIO stock’s prospects for success. When considering whether to plug into Nio, investors should proceed with caution.

On the date of publication, Rich Duprey 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.