Nio (NIO 3.70%) was one of the hardest-hit electric vehicle (EV) stocks in 2022. Although Nio's deliveries rose steadily through the year, production and supply chain hiccups made it a bumpy ride even as rising costs weighed down margins. Investors were pinning their hopes on a stronger 2023, especially after management announced its growth plans some months ago.
Turns out, Nio's challenges are far from over. The company's fourth-quarter numbers just came out, and there's one metric that's caught the market's attention for all the wrong reasons.
Is Nio having real problems that should worry investors now, or should you get greedy while the markets are fearful and buy Nio stock on every dip?
Nio's fourth quarter was a record
Nio stock slipped after the EV maker slashed its fourth-quarter deliveries outlook in December. Nio, however, beat its revised guidance and delivered 40,052 vehicles in Q4, up a solid 60% year over year.
Also, it was a record quarter for Nio, with its revenue surging 62% year over year to $2.3 billion. During the quarter, Nio launched two new models on its second-generation technology platform -- the coupe SUV EC7 and SUV ES8.
CEO William Li confirmed the company's plans to start deliveries of five new products on its new platform in 2023 and build 1,000 power swap stations this year. Nio differentiates itself from competitors with its battery-as-a-service (BaaS) program under which customers can buy its cars on the cheap without battery packs and subscribe to plans to charge and swap their batteries at Nio's power stations. As of Jan. 17, Nio had around 1,300 power swap stations in China.
So far so good, so what's hurting Nio?
Unfortunately, the company is struggling to convert higher sales into profits, raising concerns about its path to profitability.
The number that's hurting Nio stock most
Nio has faced a serious challenge in recent quarters: growing its vehicle and gross margins. In fact, much to everyone's surprise, its vehicle and gross margins plunged dramatically year over year to only 6.8% and 3.9%, respectively, in the fourth quarter.
Data source: Nio. Chart by author.
Nio blamed the fall in margins on "inventory provisions, accelerated depreciation on production facilities, and losses on purchase commitments for the existing generation of ES8, ES6, and EC6."
Terms like inventory provisions and loss on purchase commitments may sound questionable, but it's not what you think.
The thing is, Nio is transitioning all its car models to the second-generation platform, and apparently had a lot of inventory of old models to clear last quarter. So while some customers may have canceled purchases of the older models, Nio also offered incentives to sell them. Such promotional activities and inventory cleanup typically add to costs and drive margins lower.
Meanwhile, costs of key components like batteries remain high, and that again added to Nio's costs in Q4.
So should you buy, sell, or hold Nio stock now?
It's true that Nio's growth is decelerating: It expects to deliver only 31,000 to 33,000 vehicles in the first quarter, up only about 20% to 28% year over year.
Lower deliveries, coupled with its ongoing inventory cleanup, will also mean low margins for a couple of more quarters or so.
However, here's what you must know: Nio doesn't seem to be facing a demand problem, and there are valid reasons why its sales and margins could fall in Q1. As I mentioned, Nio is transitioning to a new technology platform and still preparing its factories to produce new models. That may take some time, which also means any fall in Nio's sales or margins could just be a short-term blip.
If the company can ramp up production of upgraded models and launch new products this year as planned, its sales and margins should pick up momentum as the year progresses. Meanwhile, Nio's key battery supplier, CATL, is reportedly offering hefty discounts to key clients including Nio, according to local Chinese media. Batteries are a major cost component for EV makers, and their prices shot up significantly in the past year or so as prices of lithium skyrocketed.
Management still expects Nio's core vehicles business to break even in the fourth quarter of 2023. You may be wary about betting as much, but there's no reason to sell Nio stock now if you own it. And if you don't own the EV stock yet, you may even want to buy some shares on the dip given Nio's growth plans for 2023 and beyond.
