NIO: Recent Earnings Continue to Show Structural Weaknesses

NIO Inc. (NIO) designs, manufactures, and sells electric vehicles (EVs). With a current line of four models, the ES6, EC6, ET7 (a luxury sedan), and the ES8 (an electric SUV), this Chinese EV maker has a worldwide presence. Despite this, NIO stock has underperformed in 2021 with losses of 16%.

Is it safe to be a contrarian now and consider that the stock price is attractive? I argue that no it is not. I am bearish on NIO stock. (See Analysts’ Top Stocks on TipRanks).

I like several features of NIO, but the valuation and fundamentals show that the road to profitability is bumpy and a highly uncertain one.

Business News: Innovating With Battery Swap Service

Investing in stocks is a constant consumption and evaluation of financial data and business news. EV stocks such as NIO have witnessed glorious days in 2021, but not without experiencing volatile trading periods.

As we move steadily to the new era of electrification in mobility, most analysts are optimistic about the future of NIO. However, there is also a wide range of price targets ranging from $38.8 by Jefferies (JEF), the most bearish one, to $70 by Deutsche Bank (DB) and $80.3 by Nomura (NMR), which is the most optimistic.

Things to like about NIO are its value-added services and charging solutions offered. These include things such as NIO House, which is “an open, welcoming space for our users and community to express, share and experience memorable moments together”, NIO Power, a mobile internet-based power solution, NIO Service, which provides a service mobile feature, and NIO Life, which focuses on lifestyle products.

One business idea that is brilliant for NIO is its Battery as a Service. This solves the biggest problem related now to electric vehicles, their range of autonomy, and the time required to charge the battery, which can take from a few minutes to a few hours, depending on the capacity of the charger.

This concept of battery swap technology is both innovative and a game-changer in the EV industry. Nio has announced on Twitter (TWTR) that it has 504 swap stations already, and that by late September 2021, NIO users had completed over 4,000,000 battery swaps.

The option to choose higher capacity batteries is also available, and this subscription-based service could add significant recurring revenue for NIO. Swapping a depleted battery with a fresh one within five minutes is a great and effective solution for drivers of electric vehicles.

On October 1, 2021, NIO announced it had achieved new record-high monthly and quarterly deliveries. NIO delivered 24,439 vehicles in the three months ended September 2021, increasing by 100.2% year-over-year, and 10,628 vehicles globally in September 2021, increasing by 125.7% year-over-year.

Not all business news is positive though now. In October 2021, the news about deliveries was not that encouraging.

It was reported that “NIO delivered 3,667 vehicles in October 2021, decreasing by 27.5% year-over-year due to restructuring and upgrades of manufacturing lines and preparation of new products introduction.”

What are some key problems NIO is facing now? First, expectations about deliveries may have to be revised lower due to global supply chain constraints, the chip shortage that has made many automakers cut back on their production.

Second, is the intense competition by other EV makers, from established brands such as Audi, Mercedes, and BMW with plans to launch new models shortly.

My biggest concern though now for NIO stock is its valuation and its fundamentals.

Valuation: Too Pricey Now, Net Losses Dampen Enthusiasm

A relative analysis valuation between price ratios of NIO and its Automobiles & Auto Parts industry shows that this Chinese automaker is trading on a large premium. NIO has a price/sales ratio of 26.2, a price/book ratio of 14.6, and a price/cash flow ratio of 517. These same metrics for the automobiles & auto parts industry are 1.1, 2.3, and 9.9, respectively.

Someone may argue that NIO may have delivered an exceptional financial performance that could partly justify this rich valuation. Sadly, this is not the case. NIO has had strong revenue growth, especially in 2019 and 2020, but it has net losses as of 2016 and a weak trend related to free cash flow. The only year of positive reported free cash flow in the period 2016-2020 is 2020, with a figure of $119.27 million.

Another red flag to valuation is NIO’s decision to fund its growth and expansion plans with stock offerings. Several stock dilutions have occurred in the past five years. This is bad news for the intrinsic value of NIO stock. When will NIO achieve profitability?

Earnings: Fiscal Third-Quarter 2021 Earnings Were Mixed

Referring to what I consider major structural weaknesses in the business model, NIO announced on November 9, 2021, its Q3 2021 earnings. The positive news is the increase in vehicle sales, vehicle margin, and gross margin.

Focusing on the total revenue, NIO reported that “total revenues in the third quarter of 2021 were RMB9,805.3 million (US$1,521.8 million), representing an increase of 116.6% from the third quarter of 2020 and an increase of 16.1% from the second quarter of 2021.”

The structural weaknesses remain though: “Loss from operations increased to (US$153.9 million), representing an increase of 4.9% from the third quarter of 2020 and an increase of 29.9% from the second quarter of 2021.”

“Net loss attributable to NIO’s ordinary shareholders in the third quarter of 2021 was RMB 2,858.9 million (US$443.7 million), representing an increase of 140.7% from the third quarter of 2020 and an increase of 333.6% from the second quarter of 2021.”

Widening net losses and operating losses are not positive factors, especially since NIO achieved increased deliveries. Another notable key factor is that for the fourth quarter of 2021, the company expects a slowdown in both the deliveries of vehicles and total revenues compared to the third quarter of 2021. This business outlook may weigh negatively on NIO stock.

Wall Street’s Take

Turning to Wall Street, NIO has a Strong Buy consensus rating, based on nine Buys and one Hold rating assigned in the past three months. The average NIO price target of $59.91 implies 51.7% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of Tipranks or its affiliates, and should be considered for informational purposes only. Tipranks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. Tipranks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by Tipranks or its affiliates. Past performance is not indicative of future results, prices or performance.