Is Nio Stock a Buy?

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The Chinese EV maker still faces a lot of near-term headwinds.

Nio (NIO -1.63%) posted its first-quarter earnings report on June 6. The Chinese electric vehicle (EV) maker’s revenue dropped 7% year over year to 9.91 billion yuan ($1.37 billion) and missed analysts’ estimates by 520 million yuan. Its adjusted net loss widened from 4.15 billion yuan to 4.9 billion yuan ($679 million) — or 2.39 yuan ($0.33) per American depositary receipt (ADR) — and missed the consensus forecast by 0.19 yuan.

Nio’s stock price dropped nearly 7% after that disappointing report, and it’s now trading more than 20% below its initial public offering (IPO) price. Should contrarian investors still buy this unloved EV stock as the bulls look the other way?

Image source: Nio.

What happened to Nio?

Nio was one of the market’s hottest EV stocks when it went public in September 2018. It produced a wide range of electric sedans and SUVs, and it differentiated itself from its competitors with removable batteries that could be swapped out at its battery stations. That approach addressed the lengthy charging times for traditional EVs.

Nio’s deliveries soared 81% in 2019, 113% in 2020, and 109% in 2021. The bulls were dazzled by those growth rates, and its stock rallied more than 10 times from its IPO price of $6.26 per ADR to its all-time high of $62.84 on Feb. 9, 2021.

Unfortunately, Nio’s deliveries decelerated over the following two years as it grappled with supply chain constraints, weather-related disruptions, macroeconomic challenges in China, and an intense pricing war across the EV market. As a result, its deliveries only rose 34% in 2022 and 31% in 2023. Its annual vehicle margin also declined from its record high of 20.2% in 2021 to 9.5% in 2023 as it lost its pricing power and grappled with rising costs.

It’s finally reaching its cyclical trough

Nio’s deliveries fell 40% sequentially and 3% year over year in the first quarter. That represented a disappointing deceleration from its year-over-year growth in deliveries in the second half of 2023. Its vehicle margin also shrank sequentially.

Period

Q1 2023

Q2 2023

Q3 2023

Q4 2023

Q1 2024

Deliveries

31,041

23,520

55,432

50,045

30,053

Growth (YOY)

20%

(6%)

75%

25%

(3%)

Vehicle margin

5.1%

6.2%

11%

11.9%

9.2%

Data source: Nio. YOY = year over year.

Nio expects its deliveries to grow again in the second quarter. It already delivered 36,164 vehicles in April and May, and it expects its total deliveries to increase 130% to 138% year over year to 54,000 to 56,000 vehicles for the entire quarter. It expects its total revenue to rise 89% to 95% year over year.

Nio expects that acceleration to be driven by its “premium brand positioning,” the “exceptional competitiveness” of its battery swapping systems, the launch of its new ET7 Executive Edition sedan, and the introduction of its lower-end Onvo smart vehicle brand. CEO William Li said those catalysts would drive its “next stage of high-quality growth.” For the full year, analysts expect its revenue to rise 20% to 66.8 billion yuan ($9.2 billion).

But its margins are still wobbly

That outlook is encouraging, but Nio needs to stabilize its vehicle margins as major competitors like Tesla continue to slash their prices. Its operating expenses are also rising as it develops new vehicles, expands its battery-swapping network, and opens new stores in Europe. It even launched its own high-end Android smartphone last year. Between the first quarters of 2023 and 2024, its adjusted operating margin dropped from negative 42.5% to negative 51.6%.

On a generally accepted accounting principles (GAAP) basis, Nio’s net loss widened year over year from 4.74 billion yuan to 5.18 billion yuan ($718 million) in the first quarter. Analysts only expect Nio to slightly narrow its net loss from 21.2 billion yuan in 2023 to 18.5 billion yuan ($2.55 billion) in 2024, but it still has 45.3 billion yuan ($6.3 billion) in total liquidity — so it won’t go bankrupt anytime soon.

Is it the right time to buy Nio’s stock?

With an enterprise value of 70.4 billion yuan ($9.7 billion), Nio’s stock looks cheap at a price-to-sales ratio of 1. But it could continue to trade at that discount until it stabilizes its deliveries and vehicle margins. The EV market also needs to warm up again and the tensions between the U.S. and China — which are weighing down many Chinese stocks — need to ease.

If you believe those things will happen, then it’s a good idea to accumulate Nio’s stock as the bulls look the other way. But for now, it’s still a speculative play that could stagnate for a few more years before all of those headwinds finally dissipate.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio and Tesla. The Motley Fool has a disclosure policy.