Over the previous 5 years, carmaker NIO (NYSE: NIO) has seen gross sales surge. First-quarter revenues have been down 39% in comparison with the fourth quarter of final yr – however they have been up 877% over 5 years. At round £1.2bn for the three months in query, they’re substantial.

But, regardless of surging gross sales revenues, NIO inventory has fallen 50% in 5 years.

Might that supply me an fascinating funding alternative? In spite of everything, even when the share price simply will get again to the place it stood 5 years in the past, that may imply doubling cash put in immediately.

Share price fall has occurred with motive

The concept of a share price “just getting back” to the place it was might be interesting however has no actual foundation in logic. I would really like my seems to get again to the place they have been 5 years in the past – however that doesn’t imply it would occur.

As an alternative, the query I must ask as an investor is what I believe an affordable price for NIO inventory can be and whether or not I see drivers that might assist push it there.

Right here, issues grow to be problematic for the present NIO funding case as I see it.

Positive, gross sales volumes and revenues have surged. So what accountants name the ‘prime line‘ (revenues) is doing effectively.

The issue is all the prices that sit between that and the ‘bottom line’. In NIO’s case, the underside line will not be a revenue, however a loss. At near £700m in the newest quarter alone, it’s substantial.

That is the important thing problem I see with NIO. It has been constantly loss-making and burnt by means of lots of money. It ended the quarter with round £2.6bn of money and money equivalents, restricted money, short-term investments, and long-term time deposits. But when it retains burning money prefer it has been, I don’t see that lasting far more than a few years at most.

A fork within the highway?

NIO may attempt to increase additional cash, on the danger of diluting current shareholders. My greater concern as a possible investor will not be in regards to the money burn a lot because the enterprise mannequin.

Rival Tesla bled money for years earlier than it grew to become worthwhile. Making vehicles is an costly enterprise with excessive fastened prices. However, with even Tesla now seeing automotive gross sales volumes falling, it’s clear that the electrical automobile market is extremely aggressive. That might be unhealthy information for smaller gamers, together with Nio.

The corporate has pinned lots on its battery-swapping expertise, explaining a few of its money burn. However the potential for considerably longer battery ranges may depart that aggressive benefit useless within the water.

NIO would then must rely extra on its model, design, and different options that assist set it aside from rivals. Once more, although, it’s not the one carmaker making an attempt to try this.

With a enterprise mannequin that has but to show worthwhile, money pouring out the door, and a brutally aggressive outlook for the electrical automobile market even earlier than contemplating any future tariff modifications, the dangers listed here are too excessive for me.

If issues go effectively and NIO proves its enterprise mannequin, the inventory might effectively double in future. However I’d need to see far more proof of progress in that course earlier than I’d even contemplate investing.