Two key attributes that I often look for in companies when deciding whether to invest in them are points of differentiation and competitive advantages. Points of differentiation distinguish companies from their competitors. Some of these points result in competitive advantages that enable firms to gain market share. Ultimately, market share gains frequently result in higher profits. Finally, stock prices usually rise because of higher profits.
Both Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL) made products that consumers viewed as much more attractive than those of their competitors. That was their main point of differentiation. It became a huge competitive advantage for both of them, enabling them to gain market share and tremendously boost their profits.
While Chinese electric vehicle (EV) maker Nio (NASDAQ:NIO) has its own key point of differentiation, the evidence suggests it’s not yet a competitive advantage for the firm. I’m unsure if that situation will change in the future. Moreover, Nio is facing very stiff competition and its recent growth metrics have been quite unimpressive.
Given these points, I recommend investors sell NIO stock.
Nio’s Key Point of Differentiation
Nio’s key point 0f differentiation is its extensive battery-swapping network. With battery swapping, EV drivers can exchange their used batteries for new, full batteries at specified locations.
I’ve always believed that battery swapping would make driving EVs much more attractive for consumers. That’s because, in a short period of time (three minutes, according to Nio), battery swapping would allow EV drivers to go from having very little driving range to having hundreds of miles available again. As a result, the system, if implemented on a broad scale, could largely eliminate both the “range anxiety” issue and the need to wait a long time before EVs are mostly or fully charged.
But history strongly suggests that my faith in the power of battery swapping was misplaced. Nio said in March that it had carried out 40 million battery swaps yet the firm is still losing a great deal of money. It is also far from being one of China’s leading EV makers. For example, the automaker handed over slightly more than 160,000 vehicles in 2023, while its rival BYD (OTC:BYDDF) delivered a bit more than 3 million vehicles last year. What’s more, Nio lost nearly $2.8 billion last year.
Moreover, an Israeli startup called Better Space focused on battery swapping about 10 years ago and suffered “massive losses.” It eventually disappeared.
Could Battery Swapping Eventually Be a Competitive Advantage for NIO Stock?
In November 2023, Nio began partnering with several other Chinese automakers on “developing battery swap standards and expanding the network in China,” CNBC reported.
By working with other automakers, Nio will be able to foster the creation of a huge battery-swapping ecosystem and spread the word about the service more effectively. On the other hand, if more automakers offer the service, Nio’s point of differentiation and competitive advantage become greatly diluted.
Further, automakers and battery makers are developing EV batteries that can be charged relatively quickly. For example, Tesla’s superchargers allow 200 miles of range to be added to vehicles’ batteries in just 15 minutes. And Israeli startup StoreDot says that the range of its batteries can be increased by 70 percentage points in only 10 minutes.
Over the longer term, these and other advances in EV batteries may make battery-swapping services less attractive.
Nio’s Tough Competition and Unimpressive Growth
Nio is facing an array of very tough competitors in the Chinese EV market. In addition to Tesla and BYD, Nio has to contend with many Western giants whose vehicles are generally very popular in the Asian country. Among the names in the latter category are General Motors (NYSE:GM) and Volkswagen (OTC:VLKAF).
And there are indications that Nio is faltering amid the tough conditions. For example, in Q4 of 2023, its revenue from EV sales increased just 4.6% versus the same period a year earlier. Its operating loss only fell by 4% during the quarter versus the same period a year earlier to a very steep $933 million.
The Bottom Line on NIO Stock
NIO stock has a low price-to-sales ratio of one. Still, given the uncertain value of the company’s only apparent point of differentiation and its uninspiring growth. I advise investors to sell the shares at this time.
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