Nio Q3 Earnings: What Investors Need to Know

Nio (NIO 0.25%) specializes in premium electric vehicles (EVs). Since developing its first car in 2016, the Chinese automaker has steadily ramped up production, though it still doesn't crack the top 15 in terms of EV market share.

In this Backstage Pass video, which was recorded on Nov. 10, Motley Fool contributor and auto expert John Rosevear shares his thoughts on Nio's third-quarter financial performance. Motley Fool contributor Brian Withers also appears in this clip.

John Rosevear: Some context for folks, Nio is a company in China that makes electric vehicles. What a novelty. It's often thought of by U.S. investors as part of a set with two other companies that are also recent start-up electric vehicle makers, XPeng and Li Auto. They all have subtly different positioning. Nio for a while was the biggest seller, and it has kind of been overtaken this past year by both of the other two, because of where it is on its product cycle. We'll talk about that in a minute.

China's auto market is something of a Wild West. It's the largest one in the world. There are a lot, every company you've ever heard of, every auto company is doing business in China. Some you've never heard of have been doing business in China. Nio stands out. First of all, because of the set of emerging electric vehicle makers in China. It's aiming most closely at market niches occupied by Tesla. They're upscale vehicles, they're fast, they're sporty, they have sleek styling. Nio has gone to considerable lengths to build a fan base, to build a following. They have centers where Nio owners can come and hang out and so forth. Interesting company, big emphasis on personal service.

They have executed very well, but they are an automaker. As I've told this story a few times over the last couple of weeks on this program, we're short of computer chips of the specific varieties that automakers use and that has hampered output for just about everybody. One thing to note, Nio delivered a bit over 24,000 vehicles in the quarter. Nio has plenty of demand. They have a deep order book and their factory, assuming they can get the parts, can produce about 10,000 vehicles a month. As you can see, they're running short of what they could be doing. Still, almost exactly double what it did in the third quarter of 2020. Let's look at the numbers. Revenue was a little over $1.5 billion, up 116%. That beat Wall Street expectations. Adjusted EPS was a loss of $0.06 a share. Big improvement over the $0.82 a share it lost in the third quarter of 2020. Wall Street expected, I think, a $0.09 loss.

Outlook for Q4 revenue, you can see the range there, that's a miss. The Street was looking for something more like $1.74 billion, if memory serves. We'll get back to that in a moment, what's going on in the fourth quarter right now. In terms of the third quarter, vehicle margin, this is gross margin specifically to new vehicles. It's a number they report every quarter and it shows you gross level profitability. It was down a little from Q2. It was up from last year. Costs are up, commodities are up; they're scrambling to find chips, just like almost every other automaker in the world.

They bought back more equity. I'm going to take a moment to talk about what that is. Nio was in real trouble in the beginning of 2020. They got a bailout from economic development authorities in Anhui Province, which is China's industrial heartland. Its newest home base. They got about $1 billion, which put them right back on course. In exchange, they did this complex looking deal where they put all of their in-China assets into a subsidiary called Nio China, and they gave up about 24% of that to the economic development authorities. They have been buying that back over time as they've had cash flow and so forth to do so. The latest update is they now own, hang on, 92.114% of Nio China, and that's up from 76% when the deal was done in April or May of last year. That is a good thing. It means they've got more of their business. They're getting it back from these people who essentially lent them money.

OK, outlook: Q4 is going to be flat to down. Again, it's the chips, it's the commodities, but also they took some factory downtime in October because they retooled an assembly line to launch to make their new sedan, which is coming out early next year, the ET7. This is going to be their flagship product. It's stuffed with all their latest technology. It's quite sleek and handsome looking. But that is why revenue is going to be down in the fourth quarter, flat to down from third quarter. I'm a little surprised that it took the Street by surprise because Nio talked about their factory downtime and so forth. But despite the shortages, despite the commodity issues and so forth, CEO William Li did confirm that the three new products they plan to launch in 2022 are all on track.

Brian Withers: Are they only selling cars to people in China, or is this an international business?

Rosevear: They are just beginning to go international. They set up shop in Norway and began sales September, October, just a few months ago. Folks may know that Norway's become pretty much the world's leading market for electric vehicles per capita because of generous incentives and they have a good charging network and so forth. Lots of people. Tesla has done terrific business in Norway for a few years now. Ford is selling Mustang Mach-E there. Nio has come in. XPeng, one of the other Chinese automakers we referenced has also come in there. They would like eventually to be selling in both Europe and North America. They've had a design center in California for a while, but I'd say design center. They're also doing some technology stuff. There are engineering, advanced driver assist stuff and so forth. Right now they're not there yet. Again, it's all they can do to meet demand in China under the circumstances at the moment.