Nio (NYSE:NIO), a prominent player in the electric vehicle industry, has been a rollercoaster of a stock. The company’s shares have seen a considerable drop since their 2021 peak. Is now the time to start betting on a reversal in trend?

First, let’s talk company dynamics. NIO stock has been affected by China’s slow economic growth. In addition, the company’s gross margin, at a meager 1.5%, raises concerns about its ability to maintain profitability in a high capex industry like automobiles, especially when industry leaders like Tesla (NASDAQ:TSLA) are pushing margins down.

However, the company’s shares have started to recover, gaining over 35% since the end of May 2023. This sudden increase can be attributed to Nio’s strategic decision to slash its vehicle prices, following the trend set by Tesla and other EV manufacturers. General optimism around equities that we saw in June into July also has helped.

Nio’s Deliveries: A Mixed Bag

Nio’s deliveries have faced a year-over-year decline in both June and Q2 of 2023, which is a significant factor behind reduced investor interest. In June 2023, it delivered only 10,707 vehicles compared to 12,961 in June 2022, marking a 17.4% YOY decrease. The Q2 deliveries also declined 6.1% YOY, with 23,520 vehicles delivered.

However, it’s worth noting that despite multiple setbacks due to Covid-19 lockdowns, Nio managed to deliver a record number of vehicles in Q4 2022, marking a 51% YOY increase. The company’s annual deliveries in 2022 also saw a 34% rise over 2021, indicating a strong recovery potential.

Nio’s Financial Health: A Cause for Concern

Despite its growth prospects, Nio’s financial health raises some red flags. The company’s Q1 2023 gross margin fell to just 1.5% from 14.6% in the same quarter of 2022. With Nio and other premium EV manufacturers already offering generous price discounts, this price war could pressure Nio’s profitability further.

Adding to the worry is NIO’s Q1 2023 net loss of $690 million, which has significantly reduced its cash reserves. Nonetheless, a strategic $1.1 billion investment from an Abu Dhabi government fund in June 2023 aimed at funding its international growth has provided a much-needed boost to its financial resources.

Nio’s Future Prospects: A Ray of Hope

Despite the challenges, NIO’s prospects look promising. Its focus on innovative technologies such as battery swapping, autonomous driving, and an AI-driven digital cockpit could attract new buyers. This in turn will fuel its revenue growth.

Moreover, Nio’s expansion into several European countries and its introduction of new EV models are expected to drive increased sales in 2023-2024. The company also plans to have five new models by mid-2023, as it aims to capture a larger share of China’s EV market.

NIO Stock: To Buy or Not to Buy?

While Nio’s growth and opportunities make it an attractive investment prospect, it’s not quite a “buy” situation yet. The company’s price-to-sales multiple stands at an attractive 2.4x, the lowest since 2019, but the company’s lack of profitability and the risks posed by the ongoing price war in the EV industry make it a high-risk investment.

A lot remains to be seen with NIO stock, and the broad market environment looks challenged to me. Still, it’s one to keep on a watch list.

On the date of publication, Michael Gayed 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.