Nio Fails in 1 Key Area -- But You Don't Have to Sell the Stock

Nio (NIO -1.57%) is one electric vehicle (EV) stock whose earnings are watched closely. It is, after all, one of the top players in the world's largest EV market, China, and although there have been hiccups along the way, Nio has shown a lot of promise so far.

Yet, although Nio is steadily launching new models, delivering a higher number of cars, and growing its top line, it is struggling to show investors a clear path to profitability. Nio is bleeding, and that has made investors increasingly skeptical in recent months. And it's one of the major reasons the EV stock has lost so much value in such a short period.

Nio's second quarter was, unfortunately, no different. But if you're tempted to sell the EV stock, you'll want to read this first.

The biggest challenge facing Nio

Nio's margins are headed in one direction: downward.

Data source: Nio financial statements. 

Nio's vehicle margin and gross margin were also much higher in the second quarter of 2021, at 20.3% and 18.6%, respectively.

Nio's margins are falling despite a growing top line. In Q2, its revenue grew nearly 22% year over year to $1.5 billion as it delivered 25,059 vehicles, up 14% from the year-ago period.

So what's ailing the EV maker? Cost pressures. Nio blamed higher battery costs per unit for the fall in its vehicle margin, which squeezed its gross margin. Nio lost $326 million on an adjusted basis in Q2, up a whopping sixfold year over year.

Here's the thing, though: This isn't a Nio-specific problem, as surging prices of key battery component metals like nickel, lithium, and cobalt have made things tougher for most EV manufacturers, even forcing many to hike the prices of their vehicles to offset part of the costs.

More importantly, the second half of the year is crucial for Nio, and the company could reveal some surprises that could help its stock price recover. 

The road ahead for Nio

There are two key things you must know about Nio's plans for the coming months: deliveries and sales mix.

Nio expects to deliver 31,000 to 33,000 EVs in the third quarter and generate revenue between $1.9 billion and $2 billion. That means solid sequential growth, and could also mean Nio expects supply and cost pressures to ease.

Even more important is this point from Nio's Q2 earnings report: A favorable sales mix partly helped offset higher battery costs. In other words, Nio sold a larger number of higher-margin EVs in the quarter, unlike in Q1, and the change is significant.

Nio started deliveries of its ET7 sedans in March and barely sold 163 units in the first quarter. That number shot up to 6,749 units in the second quarter. Meanwhile, the share of Nio's lowest-priced trim, the ES6 SUV, dropped to 39% of overall deliveries in Q2, down from 52% in Q1.

ET7 deliveries should only rise from here as Nio ramps up production in China and starts selling the sedan in Europe, where it shipped out the first batch in August. That also means Nio's margins could improve going forward. 

Then there's its first mid-to-large size SUV, the ES7, which Nio started delivering at scale in August, and its mid-size premium sedan, the ET5, that it'll start delivering this month. According to CnEvPost, Nio stated this morning on its earnings call that it's targeting 10,000 deliveries of the ET5 in December alone. Last month, the China-based website said Nio had received nearly 200,000 preorders for the ET5. This sedan could be a game-changer for Nio.

Nio is a stock to buy and hold

Nio expects deliveries to hit a new record every month in the fourth quarter, and is reportedly planning to launch EVs in different price ranges to cater to a larger market, according to CnEvPost. The EV maker is evidently eyeing a bigger share of the Chinese EV market, which is projected to grow exponentially. S&P Global projects more than 15 million EVs will be sold in China by 2030, up almost fivefold from 2021. 

With Nio's projections for the upcoming quarters also putting concerns about decelerating growth to rest, selling the EV stock right now may not be the smartest investing decision.