Is Nio Stock a Buy Now?

Nio (NIO -0.19%) posted its first-quarter earnings report on June 9. The Chinese electric-vehicle (EV) maker's revenue rose 8% year over year to a U.S. equivalent of $1.55 billion, which missed analysts' estimates by $80 million. Its adjusted net loss more than tripled to $604 million, but its adjusted loss of $0.36 per American depositary share still cleared the consensus forecast by a nickel.

Those numbers were a mixed bag, but Nio's stock barely budged after the report and remains nearly 90% below its all-time high from February 2021. Should investors take the contrarian view and buy this unloved stock anyway?

Image source: Nio.

Can Nio keep growing in a crowded EV market?

Nio initially generated a lot of buzz with its E9 electric supercar in 2016, but it never mass-produced that eye-catching $1.2 million vehicle. Today, it sells a broad range of electric SUVs and sedans. 

Nio differentiates itself from its competitors with a network of battery swapping stations, which enable its drivers to quickly exchange their depleted batteries for fully charged ones. It charges a monthly subscription fee for this "Power Swap" service, and it offers discounts on its vehicles for customers who sign up for a subscription during their initial purchase.

The company significantly ramped up its deliveries over the past five years, but it suffered a slowdown in 2022 as it grappled with intermittent COVID lockdowns in China, supply chain disruptions, and extreme weather conditions in certain regions.

Data source: Nio. YOY = Year over year.

A lot of those headwinds waned this year, but Nio's deliveries still declined 22% sequentially in the first quarter. For the second quarter, it expects its deliveries to decline sequentially again to 23,500 to 25,000 vehicles, and for its total revenue to decline 9% to 15% year over year. 

Another issue is its vehicle margin, which is being squeezed by the pricing war in China's EV market. That metric shrank from 20.1% in 2021 to 13.7% in 2022, and then dropped year over year from 18.1% to 5.1% in the first quarter of 2023. But as Nio's vehicle margins shrivel, it continues to expand its capital-intensive Power Swap network. It's trying to offset that pressure by reining in its marketing expenses, but its adjusted operating loss still nearly tripled year over year in the first quarter.

To make matters worse, it's easy to find other Chinese EV makers that are growing more quickly than NIO. For example, Li Auto (LI -0.91%), which produces plug-in hybrid electric vehicles, saw its deliveries surge 177% in 2021 and rise 47% to 133,246 vehicles in 2022. In the first quarter of 2023, Li's deliveries increased another 66% year over year, and grew 14% sequentially, to 52,584 vehicles as it maintained a much higher vehicle margin of 19.8%.

Is Nio an undervalued growth play at these levels?

Nio's decelerating sales growth and widening losses caused the bulls to retreat over the past year. Rising interest rates, trade tensions with China, and delisting threats regarding U.S.-listed Chinese stocks all exacerbated that selloff.

Analysts still expect Nio's revenue to rise 59% to $10.96 billion this year as its net loss widens year over year to $2.58 billion. Based on those estimates, Nio's stock, currently trading equal to this year's sales, looks dirt cheap. However, Nio's grim outlook for the second quarter suggests that those forecasts might be too bullish. By comparison, Li trades at two times this year's sales and Tesla (TSLA -3.48%), which recently lowered its prices in China in an escalation of its pricing war with Chinese EV makers, trades at eight times this year's sales.

Therefore, Nio might seem undervalued relative to its industry peers, but it probably won't command a higher valuation until its shipments stabilize, its vehicle margins improve, and it meaningfully narrows its operating losses. Simply put, investors should steer clear of Nio and stick with other growth stocks instead.