A stampede of bulls rushed to Nio (NIO 8.72%) and Bilibili (BILI 4.96%) during the buying frenzy in growth stocks in early 2021. Nio's stock hit an all-time high of $62.84 on Feb. 09, 2021 as the Chinese electric vehicle (EV) maker dazzled investors with its soaring deliveries. Bilibili reached its record high of $156.37 on Feb. 10, 2021 as the Chinese gaming, streaming video, and e-commerce company impressed the market with its rapid growth and persistent popularity among Gen Z users.
But both of these Chinese stocks crashed as their growth rates cooled off, rising interest rates popped their bubbly valuations, and delisting threats in the U.S. clouded their long-term prospects. That's why Nio and Bilibili now trade at just $15 and $19, respectively. Should investors buy either of these out-of-favor Chinese growth stocks before the bulls come back?
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Nio is struggling to keep pace with its competitors
Nio produces a wide range of electric sedans and SUVs. It differentiates itself from its competitors with a nationwide network of battery-swapping stations which enable its drivers to quickly swap out their depleted batteries for fully charged ones.
Nio's annual deliveries more than doubled in both 2020 and 2021. But in 2022, its deliveries only grew 34% to 122,486 vehicles. That deceleration deepened in the first quarter of 2023 as its deliveries rose 20% year over year to 31,041 vehicles, and its deliveries actually declined 6% year over year to 23,520 in the second quarter. It mainly blamed that slowdown on supply chain constraints, extreme weather conditions in certain regions, intermittent COVID lockdowns in China throughout 2022, and tougher competitive headwinds across China's increasingly crowded EV market.
As Nio's revenue growth cooled off, its vehicle margin declined from 20.1% in 2021 to 13.7% in 2022, then shrank to just 5.1% in Q1 2023. That contraction was caused by the ongoing price war in China's EV market, which was significantly exacerbated by Tesla's price cuts in the country earlier this year.
Nio is now growing at a slower pace than some of its domestic rivals like Li Auto (LI 6.69%), which grew its deliveries of plug-in hybrid electric vehicles (PHEVs) by 177% in 2021, 47% in 2022, and 66% year over year to 52,584 vehicles in Q1 2023. Li also maintained a much higher vehicle margin of 19.8% in Q1.
For 2023, analysts expect Nio's revenue to rise 33% to 65.8 billion yuan ($9.2 billion) as its net loss widens from 14.6 billion yuan to 15.3 billion yuan ($2.1 billion). Nio's stock might seem cheap at less than three times this year's sales, but its recent slowdown suggests that analysts might still be too bullish regarding its near-term prospects.
Bilibili faces a lot of near-term headwinds
Bilibili publishes mobile games, operates an online video platform (which focuses on anime, comics, and gaming content), and sells tie-in merchandise through an e-commerce marketplace. It also sells ads across its entire ecosystem.
Bilibili's popularity among China's Gen Z users has made it one of the few media platforms which continued to thrive as ByteDance's Douyin (known as TikTok overseas) disrupted the streaming-media and advertising markets. Its revenue surged 77% in 2020 and 62% in 2021 but rose just 13% in 2022.
That slowdown was caused by three headwinds. First, its gaming revenues fell as China's regulators passed tighter playtime restrictions for minors and suspended new game approvals throughout 2021 and 2022. Second, the growth of its value-added services business (which generates revenue from subscriptions, virtual gifts, and other add-on content for its streaming videos) cooled off as China cracked down on live streaming platforms. Lastly, the broader slowdown of the Chinese economy -- which was worsened by the COVID lockdowns -- disrupted the growth of its advertising and e-commerce businesses.
Bilibili expects its business to stabilize with 10% to 19% revenue growth this year as China finally experiences a post-COVID recovery. Analysts expect it to narrow its net loss from 7.5 billion yuan ($1.1 billion) in 2022 to 3.8 billion yuan ($530 million) this year. However, Bilibili's slowing growth, lack of profits, and exposure to various macro, competitive, and regulatory headwinds makes it less appealing than many of its peers -- even if its stock seems cheap at two times this year's sales.
The winner: Bilibili
I wouldn't rush to buy either of these Chinese stocks right now, especially when more balanced plays like Alibaba and Pinduoduo are still on sale. But if I had to pick one right now, I'd definitely choose Bilibili because its problems are mainly caused by macro and regulatory challenges instead of deeper fundamental issues. Meanwhile, Nio is falling behind its competitors in a margin-crushing price war, and the cracks in its business could grow much wider as the war drags on.
