What happened

Nio (NIO 5.83%) pleased investors with its forward projections when it reported third-quarter earnings a month ago. But another Chinese electric vehicle (EV) maker's third-quarter report has Nio shares dropping in sympathy today. Nio shares were trading near the day's low, down 5.3% as of 3:45 p.m. ET. 

So what

When Nio announced its quarterly results on Nov. 10, it told investors vehicle deliveries increased almost 30% year over year. But what really caught investors' attention was the projection for fourth-quarter deliveries to surge as much as another 52% sequentially from the third quarter. Today, Li Auto (LI 1.46%) said it also expects to deliver up to 48,000 EVs in its fourth quarter. That would represent a more than 80% jump over its third-quarter shipments.

That would seem to indicate that the production and demand environment remain strong in China, despite recent restrictions enacted to slow the spread of COVID-19. Those restrictions are starting to ease, too, which should be another positive development. So why did Li Auto stock tank today, bringing Nio along for the ride? 

Gold Nio ET5 in front of battery swap station.

Image source: Nio.

Now what

The reason is that Li's report has investors focusing more on profit margin than shipment volume. Li surprised investors with a sharp decline in vehicle margin from 21% in the prior quarter as well as the year-ago quarter to just 12% in the third quarter. The main reason for that drop were provisions taken for losses on commitments for Li's older vehicle model.

That shouldn't be a recurring hit, but it highlighted the dropping margins Nio also reported during its third quarter. Nio's vehicle margin also dropped both year over year and sequentially. However, since it was not due to a one-time charge, investors may be getting more concerned about higher costs and a longer pathway to profitability for Nio and other Chinese EV start-ups. That seems to be taking some of investors' risk appetite away from these more speculative stocks.