Nio (NIO 8.72%) recently reported its second-quarter results, and there were a couple of things the company should be proud of. Mainly, the company's revenue and vehicle sales saw significant increases from the year-ago quarter.
In the recent past, climbing revenue and rising vehicle sales would have likely sparked positive sentiment among electric vehicle investors. But not so much right now. Investors are instead keeping a close eye on companies' bottom lines, and they didn't like what they saw from Nio's latest quarter.
Image source: Nio.
Accelerating sales and vehicle deliveries
Let's start with the good news first, because it was pretty good. Nio managed to deliver 25,059 vehicles in the second quarter, up from 21,896 deliveries in the year-ago quarter.
Those deliveries outpaced the company's own guidance for the quarter, and resulted in Nio's sales climbing 22% from the year-ago quarter to $1.54 billion.
Even more impressive is the fact that the delivery increases came as the company was forced to shut down production in both April and May due to China's strict zero-COVID policy.
Production appears to be back on track, at least for now, and the company's management said in a press release that the second half of this year is a "critical period" of ramping up production. The company expects vehicle deliveries between 31,000 to 33,000 in the third quarter, representing a 31% increase at the midpoint of guidance.
Not so fast
All of the above is well and good, but unfortunately there were also some pretty big negatives for Nio in the second quarter -- specifically its bottom line.
Nio's losses widened to $409.8 million in the quarter, far worse than its loss of $90.9 million in the year-ago quarter. On a per-share basis, the EV makers lost $0.20, compared to a loss of $0.03 in the year-ago quarter.
That is, in financial speak, not great. The reason for the massive loss was "cost volatilities" according to Nio's chief financial officer Steven Wei Feng. Those volatilities are thanks to the aforementioned COVID lockdowns, investments in its power and service networks, and increases in battery costs.
Feng said on the company's earnings call that "The decrease of vehicle margin year-over-year and quarter-to-quarter was mainly attributed to increased battery cost per unit..."
But the EV marker's losses also widened from an increase in spending. Nio's research and development (R&D) costs increased 143% to $320.9 million, while selling, general, and administrative (SG&A) costs increased 52% to $340.8 million.
And things might not improve dramatically in the short term either. Feng said on the call that while higher selling prices for some of its EVs will help margins in the third quarter, "in [the] short term, we are still facing great uncertainty and challenges regarding the battery cost ... which will have a negative impact to our gross margin."
Speed bumps ahead
Of course, any new start-up (especially in the EV space) needs to spend a lot of money to grow. It's not exactly problematic for Nio to be increasing some of its spending, nor is it unusual for the company to experience rising battery costs.
But investors do need to understand that buying the company's stock right now comes with a hefty dose of volatility because of those rising costs. In better times, increasing revenue and vehicle sales probably would have been enough to send Nio's stock soaring.
Investors are looking for profits now -- or at least not widening losses. If Nio can't figure out a way to improve its bottom line, its share price will have a hard time recovering.
That doesn't mean Nio is a bad investment, and it certainly doesn't mean the company is doomed, but it does mean that Nio investors will likely have to stomach some more share price drops as this company tries to gain traction in the EV market.
