The Chinese electric vehicle maker Nio (NIO +6.67%) was a favorite among investors at the height of the pandemic. Part of the exuberance for the company came from an overly optimistic view of how fast EV companies will grow. But Nio's stock has fallen 60% over the past year. This huge drop has caused many investors to ask whether or not Nio is a good stock to buy right now.
To answer that question, let's take a closer look at what is going right for Nio right now, and what hurdles the company is facing.
Image source: Nio.
What's going right for Nio right now
All start-up companies need a lot of cash to get off the ground, and Nio is doing fantastic on this front.
The company ended the third quarter with $7.2 billion in cash and cash equivalents, giving Nio plenty of money to keep its company running for a while.
Not only is Nio well-funded, but the company has also done an impressive job of ramping up vehicle deliveries over the past few years. In the fourth quarter vehicle deliveries rose 60% to 40,052. And for all of 2022 deliveries increased by 34% to 122,486.
Nio's revenue is also climbing quickly, with revenue up 32% to $1.8 billion in the third quarter. While Nio has already released its fourth-quarter delivery figures, it won't release its fourth-quarter financial results until next month.
Finally, Nio is benefiting from the fact that China is the world's largest automotive market, and EV adoption in the country is one of the highest globally.
In the first half of 2022, China accounted for 56% of global passenger EV sales -- up from 48% in 2021, according to Bloomberg research.
NYSE: NIO
Key Data Points
What's going wrong for Nio
Based on all of the above, it's not surprising that some investors have been bullish on Nio. But there are also some significant hurdles that the company faces that could slow down the company's growth story.
First, while Nio's deliveries have accelerated over the past few years, the company is facing a slowdown right now. The company said in a statement in December that it faced delivery and production challenges because of the recent coronavirus outbreak in China.
As a result, the company's deliveries of 40,000 vehicles for the fourth quarter were below management's original estimates of between 43,000 to 48,000 vehicles.
In addition to China's current coronavirus issues, economic storm clouds are forming in the country right now, and many economists are expecting China to enter a recession this year if it isn't already in one.
Image source: Nio.
An economic slowdown would be problematic for Nio and other automakers, as consumers may be inclined to put off large purchases until the economy rebounds.
Some EV makers, including Tesla, have already had to cut vehicle prices in China to spur demand.
Making matters worse, Nio's gross margins are decreasing. In the third quarter Nio's gross margins fell to 13.3%, down from 20.3% in 2021 in the year-ago quarter.
An increase in battery costs, a decrease in government automotive credits, and an increase in investments all weighed down on Nio's margins.
Nio stock isn't a buy right now
Nio's stock may look cheap right now with the company's price-to-sales ratio of 2.7, but for all of the reasons listed above I'd be hesitant to buy Nio stock right now.
Nio is still unprofitable, and with gross margins moving in the wrong direction there's still more uncertainty for Nio ahead.
All of this makes Nio a risky investment right now, and one that I think investors should avoid.
