Is NIO Stock a Buy Now?

The Chinese electric vehicle maker NIO (NIO -0.93%) has taken investors on a wild ride since its IPO in Sept. 2018. It went public at $6.26 per share and surged to an all-time high of $62.84 last February, but subsequently stumbled back to about $14. Like many other EV makers, NIO initially attracted a stampede of bulls during the stimulus-induced rally in growth stocks, but quickly lost its luster amid rising interest rates and other macro headwinds.

Yet NIO is already producing tens of thousands of vehicles each year, putting it far ahead of smaller EV makers that are struggling to ramp up their production. At three times this year's sales, NIO's stock also looks cheap relative to most of its industry peers. So could this be the right time for patient investors to pick up some shares of NIO?

Image source: NIO.

Reviewing NIO's core business

NIO launched its first electric vehicle, the high-end EP9 supercar, back in 2016. However, this vehicle was never mass produced, and none of its 16 production models were ever registered for use on normal roads. In late 2017, NIO properly entered the mainstream EV market with the launch of its full-size ES8 SUV.

NIO subsequently launched two additional mid-size SUVs, the ES6 and EC6, in 2019 and 2020, respectively. In 2021, it rolled out two sedans, the ET5 and ET7, and started delivering both vehicles earlier this year. It also launched another "mid-large" SUV, the ES7, this June. The following table illustrates just how rapidly NIO ramped up its production since its IPO:

Data source: NIO.

NIO's year-over-year growth in deliveries notably decelerated in the first nine months of 2022, but it mainly blames that slowdown on COVID-19 disruptions, extreme weather conditions, and supply chain challenges instead of softer demand for its vehicles. NIO's Chinese competitor Li Auto (LI 0.94%), which delivered 90,491 Li ONE SUVs in 2021, also experienced a similar slowdown, with 86,927 deliveries in the first nine months of 2022.

However, both NIO and Li are still far ahead of their smaller American counterparts like Lucid (LCID -0.35%), which expects to produce 6,000 to 7,000 vehicles this year, and Rivian (RIVN 4.40%), which is trying to ramp up its production to manufacture 25,000 vehicles this year.

NIO also differs from its domestic and overseas counterparts because it uses battery-swapping stations, which allow drivers to quickly swap out their depleted batteries for fully charged ones, instead of charging stations. That approach makes NIO similar to the Taiwanese electric scooter maker Gogoro (GGR 2.06%), which also builds networks of battery-swapping stations for riders. Just like Gogoro, NIO charges subscription fees to access those stations.

Reviewing NIO's main challenges

NIO is gradually expanding overseas into smaller European markets like Norway, but it still generates most of its revenue in China. That concentration exposes it to the unpredictable lockdowns related to China's zero-COVID policy and the weakening of the yuan against the U.S. dollar, which reduces the value of its overseas shares. As a Chinese company, NIO could also be hurt by tougher trade restrictions for semiconductors, as well as the ongoing threats to delist U.S.-listed Chinese stocks.

Analysts expect NIO's sales to rise 61% in 2022 and increase another 82% in 2023, but those estimates seem a bit too bullish and don't seem to fully account for its decelerating shipments this year. Macroeconomic challenges could also curb the average consumer's demand for its pricey vehicles, which start at $70,000 to $80,000 (before subsidies).

NIO is still deeply unprofitable, but analysts expect it to turn profitable in 2024. That might seem possible, since NIO's gross margin already rose from negative 5.2% in 2018 to positive 18.9% in 2021 as it scaled up its business. However, its gross margins also declined year-over-year in the first half of 2022 as the macro headwinds squeezed its vehicle margins while it ramped up its investments in its battery-swapping network.

Therefore, analysts' expectations for NIO to turn profitable within two years -- which are pegged to its high sales estimates -- also seem too optimistic. On the bright side, NIO was still sitting on $8.1 billion in cash, cash equivalents, and restricted cash at the end of June, compared to a net loss of $410 million in the first half of the year, so it won't run out of cash anytime soon. Its low debt-to-equity ratio of 0.6 also gives it some room to raise fresh funds.

Is it the right time to buy NIO?

NIO looks cheap compared to Lucid and Rivian, which still trade at 31 and 17 times this year's sales, respectively. But it's still comparable to Li Auto, which also trades at about three times this year's sales. NIO and Li are both growing, but their valuations will remain depressed as long as so many macroeconomic and regulatory clouds are hanging over Chinese companies. Until some of those clouds dissipate, I wouldn't touch NIO, Li, or any other EV makers from China.