Nio (NOK 2.45%)a major electric vehicle (EV) maker in China, went public just over six years ago at $6.26 per American Depositary Receipt (ADR). The company initially impressed investors with its rapid deliveries and its stock rose to a record high of $62.84 on February 9, 2021.

But today, Nio stock is trading at around $6.50. Bulls backed down as deliveries cooled, margins fell and the company posted further losses. Rising interest rates put pressure on the company’s valuations, and macroeconomic headwinds in China exacerbated those pressures. Could this out-of-favor EV stock recover and reach new all-time highs in the next three years?

Image source: Nio.

What happened to Nio after its IPO?

Nio sells a wide range of electric sedans and SUVs, but its swappable batteries differentiate it from its competitors. These batteries can be quickly swapped at Nio’s battery swap stations and are a faster alternative to traditional electric vehicle chargers.

Nio began delivering its first vehicles in 2018. Deliveries more than doubled in both 2020 and 2021, but slowed significantly in 2022 and 2023. This slowdown is due to pandemic-related supply chain restrictions, weather-related disruptions, macro headwinds in China and intense competition in a cooling electric vehicle market.

Data source: Nio. YOY = year after year.

But in the first half of 2024, Nio’s deliveries accelerated as the company expanded its market share, launched new high-end vehicles such as the ET7 Executive Edition sedan, expanded its cheaper Onvo smart vehicle brand in China and brought in more vehicles Europe sold.

Nio’s vehicle margin fell from a record high of 20.2% in 2021 to 9.5% in 2023 due to price cuts Tesla (TSLA 0.45%) and other competitors limited its pricing power. However, vehicle margins rose again year-on-year in the first half of 2024 as the company expanded its business, overcame its supply chain issues and sold a wider mix of higher-end vehicles.

From 2019 to 2023, Nio’s revenue grew at a compound annual growth rate (CAGR) of 63%, from 7.83 billion yuan to 55.62 billion yuan ($7.93 billion). However, net loss widened to 21.15 billion yuan ($3.02 billion) from 11.41 billion yuan.

Nio’s vehicle margins are finally stabilizing, but the company continues to expand its capital-intensive battery swapping networks in China and Europe. This increased spending, as well as higher tariffs on Chinese electric vehicles in Europe, will likely make the company’s business unprofitable for the foreseeable future.

What will happen to Nio in the next three years?

From 2023 to 2026, analysts expect Nio’s revenue to grow at a CAGR of 27% to 115 billion yuan ($16.4 billion), while the company will reduce its annual net loss to 9.38 billion yuan ($1. 34 billion US dollars). Most of this growth is expected to come from the Chinese market, but it should also be complemented by gradual expansion into Europe. The company also plans to launch its cheaper Firefly smart car for its European customers by the end of this year.

If Nio meets those expectations in 2026, the company would be comparable to Tesla between 2017 and 2018, when revenue rose from $11.8 billion to $21.5 billion. Tesla narrowed its net loss from $1.96 billion to $976 million over those two years.

Investors shouldn’t expect Nio to repeat Tesla’s explosive growth trajectory, as the electric vehicle market is more mature and saturated than it was six years ago. But just as Tesla was supported by large subsidies from the US government, Nio is still heavily subsidized by the Chinese government, which has injected billions of dollars into the company over the past four years. This support should prevent an imminent bankruptcy.

Where will the stock go in the next three years?

With an enterprise value of 93.41 billion yuan ($13.32 billion), Nio shares look dirt cheap at 1.4 times this year’s sales. In comparison, Tesla trades at 8.4 times this year’s sales.

That’s because macroeconomic headwinds in China, rising tariffs on Chinese electric vehicles, and U.S.-China trade tensions are still weighing on Nio’s valuations. It will also likely take a few more Fed-influenced rate cuts to get investors back into unprofitable growth stocks like Nio. However, if these headwinds subside, Nio’s valuations could rise quickly.

If Nio meets analysts’ estimates through 2026, grows its revenue by another 20% in 2027, and trades at a reasonable four times sales, the stock could rise nearly 500% from current prices. That would be an incredible three-year gain, but it would still fall short of the nearly 870% gain needed to regain its all-time high set in early 2021.

If you’ve been following Nio during the meme stock rally, you’ll have a long wait for it to break even. But if you don’t already own Nio, it could be a good time to buy this speculative EV stock as a counterpart in the Chinese market.