Is NIO (NIO) Stock a Ticking Time Bomb?

Nio Inc. (NIO), a leading China-based electric vehicle (EV) manufacturer, has performed poorly over the past few months. Shares of NIO have plunged more than 5.4% over the past month and 17% year-to-date.

But, as per the latest headlines, it may appear that the situation will improve from here for the EV maker. On November 1, NIO announced its October 2023 delivery results. The company delivered 16,074 vehicles in October, growing by 59.8% year-over-year. The deliveries comprised 11,086 premium smart electric SUVs and 4,988 premium smart electric sedans.

Although deliveries surged by a high double-digit figure last month, growth was not as impressive sequentially. In September 2023, NIO delivered 15,641 vehicles. So, October’s deliveries represented a sequential increase of just 2.8%.

The company’s figures are lackluster compared to China-based peers such as Li Auto Inc. (LI) and Xpeng Inc. (XPEV) and past expectations.
LI’s October deliveries totaled 40,422 vehicles, increasing by 302.1% year-over-year and a sequential growth of 12.1% (based on 36,060 vehicle deliveries in September). Further, XPEV’s deliveries came in at 20,000 in October, an increase of 292% year-over-year and up 31% on a sequential basis.

While NIO’s stock did soar after the release of its delivery results, the rise was modest (nearly 2.1%) compared to LI (almost up 3.5%) and XPEV (up 7%). Moreover, the broad market rally on November 1 may have played a larger role than the vehicle deliveries news in NIO's rally.

Although NIO found support in recent trading days, the stock will likely suffer immensely in the upcoming months. So, we maintain a bearish stance on this EV stock.

Now, let’s review in detail what has happened in the past few months and discuss several factors that could impact NIO’s performance in the near term:

Poor Financial Performance

For the second quarter that ended June 30, 2023, NIO reported revenue of $1.21 billion, missing analysts’ estimate of $1.27 billion. The revenue translates to a decline of 14.8% from the second quarter of 2022. Its vehicle sales came in at $990.90 million, down 24.9% from the second quarter of 2022. The company’s gross profit decreased 93.5% from the year-ago value to $12 million.

NIO’s operating expenses grew 47.2% year-over-year to $849.65 million. Its non-GAAP loss from operations was $753.50 million, an increase of 132% year-over-year. The company’s non-GAAP net loss widened by 140.2% from the prior year’s quarter to $751 million. Furthermore, the automaker’s loss per share came in at $0.51 versus the consensus loss per share estimate of $0.24.

Unfavorable Analyst Expectations

Analysts expect NIO’s revenue for the third quarter (ended September 2023) to increase 47.2% year-over-year to $2.66 billion. However, the company is estimated to report a loss per share of $0.23 for the same period. NIO has also missed the consensus revenue estimate in three of the trailing four quarters and the consensus EPS estimates in all four trailing quarters, which is disappointing.

In addition, the Chinese EV maker’s EPS is expected to remain negative for at least two fiscal years.

High Levels of Indebtedness

On September 25, NIO closed its offering of $500 million in aggregate principal amount of convertible senior notes due 2029 and $500 million in aggregate principal amount of convertible senior notes due 2030. The issuance of a $1 billion convertible senior notes sent ripples of concern among investors and led to a significant drop in NIO’s stock price.

A debt offering generally indicates the company’s need for cash. Although issuing shares can be dilutive, a debt offering results in increased scrutiny by investors as excessive debt is often considered to hinder the company’s ability to generate a cash surplus.
Thus, higher levels of indebtedness due to additional debt offerings can be alarming as they potentially undermine the position of common stockholders. This apprehension potentially influences behavior toward NIO, reflecting concerns about the EV maker’s debt strategy and its implications for future financial stability and long-term viability.

NIO’s total liabilities were $9.52 billion as of June 30, 2023.

Struggling to Boost Sales in Europe

The Chinese EV manufacturer NIO is scrambling to drive sales in Europe, its first area of international expansion. The company is considering building a dealer network across Europe to speed up sales growth despite China-based EVs facing potential tariffs in the region.

NIO, an aspiring competitor to a world-class EV brand, Tesla, Inc. (TSLA), launched in Norway in 2021 and entered Germany, Sweden, Denmark, and the Netherlands in October 2022, enabling customers to purchase directly from its stores or online.

However, Nio began assessing dealers in key European markets after the company’s President said sales in Europe were missing expectations.
A source said that dealers were being considered both for Nio-branded cars sold in Europe and for project “Firefly,” a new affordable EV brand that the company plans to export to Europe from 2025.

Another reason to use dealers would be to ease cash pressure on NIO, which is prioritizing spending on research and battery swapping stations in China, that source added.

Job Cuts in the Face of Heightened Competition

Shanghai-based EV company Nio will reduce job positions in November and cut or defer some investment, strategic moves aimed at boosting the company’s viability as it grapples with widening losses and intense competition.

Demand for EVs has dampened in China as consumers prefer more economical plug-in hybrids, sales of which grew nearly 84.5% in the first nine months of 2023, helping automakers LI and BYD Co. Ltd (BYDDY) to gain market share.

Also, a price war started by world EV leader TSLA a year ago is dragging down the profitability of other EV makers, which have also stepped up efforts to cut costs and build partnerships to survive the escalating competition.

According to an internal letter signed by CEO William Li seen by Bloomberg News, NIO will slash its staff by 10% this month.

“Duplicate” and “inefficient” roles will be eliminated, and project investment that won’t contribute to the company’s financial performance within three years will be cut or differed, Li said.

Nio has been in a fight for survival amid fierce competition in the nation’s automotive industry over the past two years. Li wrote that to “qualify for the next round of competition,” the company must reduce costs and ensure resources for critical business areas. Also, he apologized to the colleagues who will be affected by the adjustments, as per the memo.

Price War in the EV Market

A price war instigated by Tesla a year ago increased the pressure in the EV industry, with other companies following by cutting prices in a race to attract customers as their sales showed signs of slowing.

Earlier this year, NIO slashed prices for its cars and announced delaying plans to spend on expansion and research. The Chinese electric car brand cut car prices by the equivalent of $4,200 and ended free battery swaps for new buyers.

Bottom Line

Once considered one of the dominant players in China’s EV market, NIO has poorly fallen short of its sales estimates and continued to post massive losses. The company’s revenue and earnings missed analysts’ expectations in the last reported quarter. Further, analysts and investors appear bearish about its growth prospects.

While its strategic initiatives, including job cuts and lower investment, could boost profitability in the long run, the EV maker continues to face near-term challenges with consumer preferences, fierce competition in the EV market, pricing power, widening losses, and lower margins.
Given its deteriorating financials, declining market share, lower profitability, and short-term uncertain outlook, NIO is best avoided now.

4 Stocks to Buy Instead of TSLA as Its Downtrend Continues

Tesla, Inc. (TSLA) aims to sell 20 million EVs a year by the end of this decade. However, the company faces steep competition from other manufacturers as they launch their battery electric vehicles (BEVs) and invest in ramping up their EV manufacturing capabilities.

To ward off competition and economic uncertainty, TSLA has cut the prices of its vehicles this year. Recently, the company cut the prices for Model 3, Model S, and Model X in the United States. In China, TSLA reduced Model S and X prices. The company has been focusing on boosting volume growth by lowering prices, but it is affecting its gross margins.

Due to price cuts, discounts, and tax credits, the company reported delivering a record-setting 466,140 vehicles during the second quarter. However, Wall Street analysts have cut TSLA’s third-quarter delivery estimates by 2%. They expect the EV maker to deliver 462,000 vehicles during the third quarter.

TSLA CEO Elon Musk had said during the second-quarter earnings call that although it was sticking to its target of producing 1.8 million vehicles, third-quarter production would take a hit due to essential factory upgrades that would take place during the quarter.

Some analysts have forecasted that delivery numbers will be less than 460,000 units. Deutsche Bank analyst Emmanuel Rosner lowered his delivery expectations to 440,000, down from his previous forecast of 455,000. Baird analyst Ben Kallo has projected that the third quarter deliveries would be 439,200 units.

Rosner said, “Tesla’s 3Q 2023 deliveries and production could miss Street expectations, but more important, we see meaningful downside risk to 2024 consensus due to limited volume growth next year.” The analyst has cut its target price on TSLA to $285 from $300.

Amid the confusion over the third-quarter deliveries and production figures, many analysts are worried that TSLA’s production next year will be lower than the previous estimates. Deutsche Bank believes the EV maker’s earnings could face headwinds in 2024. In an investor meeting, they said that TSLA suggested that it was not looking to ramp up production at its Austin and Berlin factories to 10,000 units per week next year.

The bank has forecasted that TSLA will produce 2.1 million units next year, down from the previous consensus estimate of 2.3 million units. They also reduced the price target of TSLA to $285 per share from $300.

Moreover, TSLA is currently trading at an expensive valuation. In terms of forward EV/EBITDA, TSLA’s 42.58x is 364% higher than the 9.18x industry average. Likewise, its 7.47x forward EV/Sales is 564.3% higher than the 1.12x industry average. Its 70.97x forward non-GAAP P/E is 410.1% higher than the 13.91x industry average.

Given the uncertainty surrounding TSLA’s near-term prospects, it could be wise to buy fundamentally strong auto stocks Ferrari N.V. (RACE), General Motors Company (GM), Li Auto Inc. (LI), and NIO Inc. (NIO).

Let’s discuss these stocks in detail.

Ferrari N.V. (RACE)

Headquartered in Maranello, Italy, RACE designs, designs, produces, and sells luxury sports cars worldwide. The company offers a range, special series, Icona, and supercars; limited edition supercars and one-off cars; and track cars. It also provides racing cars, spare parts and engines, and after-sales, repair, maintenance, and restoration services for cars.

RACE’s revenue grew at a CAGR of 18.2% over the past three years. Its EBITDA grew at a CAGR of 24.2% over the past three years. In addition, its EPS grew at a CAGR of 29.1% in the same time frame.

In terms of the trailing-12-month net income margin, RACE’s 19.46% is 342.8% higher than the 4.40% industry average. Likewise, its 30.86% trailing-12-month EBITDA margin is 180.3% higher than the industry average of 11.01%. Furthermore, the stock’s 6.73% trailing-12-month Capex/Sales is 109.4% higher than the industry average of 3.22%.

RACE’s net revenues for the second quarter ended June 30, 2023, increased 14.2% year-over-year to €1.47 billion ($1.55 billion). Its adjusted EBITDA rose 32.1% over the prior-year quarter to €589 million ($620.54 million). The company’s adjusted EBIT increased 35.3% year-over-year to €437 million ($460.40 million).

Its adjusted net profit rose 33.1% year-over-year to €334 million ($351.89 million). Also, its adjusted EPS came in at €1.83, representing an increase of 34.6% year-over-year.

Analysts expect RACE’s revenue for the quarter ending September 30, 2023, to increase 25.8% year-over-year to $1.55 billion. Its EPS for the fiscal period ending March 2024 is expected to increase 8.8% year-over-year to $1.94. It surpassed the consensus EPS estimates in each of the trailing four quarters.

General Motors Company (GM)

GM designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provides software-enabled services and subscriptions worldwide. The company operates through GM North America, GM International, Cruise, and GM Financial segments.

On August 16, 2023, GM invested $60 million in a Series B financing round of AI and battery materials innovator Mitra Chem. The company’s AI-powered platform and advanced research and development facility in Mountain View, California, will help accelerate GM’s commercialization of affordable EV batteries.

Gil Golan, GM vice president, Technology Acceleration and Commercialization, said, “This is a strategic investment that will further help reinforce GM’s efforts in EV efforts in EV batteries, accelerate our work on affordable battery chemistries like LMFP, and support our efforts to build a U.S.-focused battery supply chain.

On April 25, 2023, GM and Samsung SDI announced that they plan to invest more than $3 billion to build a new battery cell manufacturing plant in the United States, slated to start operations in 2026.

GM Chair and CEO Mary Barra said, “GM’s supply chain strategy for EVs is focused on scalability, resiliency, sustainability, and cost-competitiveness. Our new relationship with Samsung SDI will help us achieve all these objectives. The cells we will build together will help us scale our EV capacity in North America well beyond 1 million units annually.”

GM’s revenue grew at a CAGR of 13.6% over the past three years. Its EBIT grew at a CAGR of 46.6% over the past three years. In addition, its net income grew at a CAGR of 82.4% in the same time frame.

In terms of the trailing-12-month levered FCF margin, GM’s 7.27% is 42.3% higher than the 5.11% industry average. Likewise, its 15% trailing-12-month Return on Common Equity is 34.2% higher than the industry average of 11.17%. Furthermore, the stock’s 5.95% trailing-12-month Capex/Sales is 84.9% higher than the industry average of 3.22%.

For the second quarter ended June 30, 2023, GM’s total revenues increased 25.1% year-over-year to $44.75 billion. Its net income attributable to stockholders rose 51.7% year-over-year to $2.57 billion. The company’s adjusted EBIT rose 38% year-over-year to $3.23 billion. Also, its adjusted EPS came in at $1.91, representing a 67.5% increase year-over-year.

For the quarter ending September 30, 2023, GM’s revenue is expected to increase 3.9% year-over-year to $43.52 billion. Its EPS for fiscal 2023 is expected to increase 1.5% year-over-year to $7.70. It surpassed the consensus EPS estimates in each of the trailing four quarters.

Li Auto Inc. (LI)

Headquartered in Beijing, the People’s Republic of China, LI designs, develops, manufactures, and sells new energy vehicles in the People’s Republic of China. The company provides Li ONE and Li L series smart electric vehicles. It also offers sales and after-sales management, technology development, corporate management services, as well as purchases of manufacturing equipment.

LI’s revenue grew at a CAGR of 263.4% over the past three years. Its total assets grew at a CAGR of 115.8% over the past three years.

In terms of the trailing-12-month levered FCF margin, LI’s 23.51% is 360.2% higher than the 5.11% industry average. Likewise, the stock’s 7.69% trailing-12-month Capex/Sales is 139.2% higher than the industry average of 3.22%.

LI’s total revenues for the second quarter ended June 30, 2023, increased 228.1% year-over-year to RMB28.65 billion ($3.91 billion). Its gross profit rose 232% over the prior-year quarter to RMB6.24 billion ($853.63 million). The company’s non-GAAP income from operations came in at RMB2.04 billion ($279.07 million), compared to a non-GAAP loss from operations of RMB520.80 million ($71.25 million).

Also, its non-GAAP net income stood at RMB2.73 billion ($373.46 million), compared to a non-GAAP net loss of RMB183.40 million ($25.09 million).

Street expects LI’s revenue for the quarter ending September 30, 2023, to increase 245.3% year-over-year to $4.64 billion. Its EPS for the quarter ending December 31, 2023, is expected to increase 151.7% year-over-year to $0.34. It surpassed the Street EPS estimates in three of the trailing four quarters.

NIO Inc. (NIO)

Based in Shanghai, China, NIO designs, develops, manufactures, and sells smart electric vehicles in China. It offers five- and six-seater electric SUVs and smart electric sedans. The company also offers power solutions, power chargers and destination chargers, power mobile, power map, and One Click for power valet service.

On July 12, 2023, NIO announced that it closed the $738.50 million strategic equity investment from CYVN Investments RSC Ltd, an affiliate of CYVN Holdings L.L.C., an investment vehicle majority owned by the Abu Dhabi Government with a focus on advanced and smart mobility. The NIO and CYVN entities would collaborate strategically in international business and technology cooperation.

NIO’s revenue grew at a CAGR of 70.6% over the past three years. Its total assets grew at a CAGR of 55.7% over the past three years.

In terms of the trailing-12-month Capex/Sales, NIO’s 17.62% is 447.9% higher than the 3.22% industry average.

For the second quarter ended June 30, 2023, NIO’s total revenues fell 14.8% year-over-year to RMB8.77 billion ($1.20 billion). Its adjusted loss from operations widened 132% year-over-year to RMB5.46 billion ($746.93 million). In addition, its adjusted net loss attributable to ordinary shareholders of NIO widened 140.2% year-over-year to RMB5.45 billion ($745.56 million).

Furthermore, its adjusted net loss per share attributable to ordinary shareholders widened 144.8% year-over-year to RMB3.28.

For the quarter ending September 30, 2023, NIO’s revenue is expected to increase 47.2% year-over-year to $2.66 billion.