Is It Too Late to Buy Nio Stock?

Nio (NIO 6.07%) posted its second-quarter report on Aug. 29. The Chinese electric vehicle (EV) maker's revenue declined 15% year over year to 8.77 billion yuan ($1.21 billion) and missed analysts' estimates by $60 million. Its adjusted net loss more than doubled from 2.19 billion yuan to 5.44 billion yuan ($751 million), or $0.45 per American depositary share (ADS), but still beat the consensus forecast by $0.04 per ADS.

Nio cleared Wall Street's low bar, but the stock remains more than 80% below its all-time high. Let's see if it's too late to bet on a long-term turnaround.

Image source: Nio.

Why did the bulls abandon Nio?

Nio sells a wide range of electric SUVs and sedans. The company differentiates itself from competitors with a network of battery-swapping stations that enables drivers to swap their depleted batteries for fully charged ones. Nio initially offered free lifetime battery swaps as a paid add-on for its new vehicles, but it phased out that loss-leading promotion earlier this year to expand its "battery as a service" subscriptions.

Nio's annual deliveries more than doubled in both 2020 and 2021. That rapid expansion, along with the buying frenzy in growth and meme stocks, drove its shares to a sky-high valuation. At Nio's peak in February 2021, its enterprise value hit $91.4 billion -- or 18 times the revenue it would generate in 2021.

But over the past year, Nio's year-over-year growth in deliveries slowed to a crawl and turned negative in Q2. Deliveries also fell sequentially for two straight quarters.

Data source: Nio. YOY = year-over-year.

Nio blamed that slowdown on the intermittent COVID-19 lockdowns in China throughout 2022, supply chain constraints for EV makers, extreme weather conditions in certain regions, and intense competition from domestic rivals and overseas challengers like Tesla.

China's sluggish pandemic recovery also produced additional headwinds in the first half of 2023. That deceleration -- along with the company's bubbly valuation, widening losses, and the delisting threats for U.S.-listed Chinese stocks -- made Nio a no-brainer target for the bears as interest rates rose over the past year.

A brighter outlook with a low valuation

But for the third quarter, Nio expects its deliveries to surge 134% to 142% sequentially and grow 74% to 80% year over year to between 55,000 and 57,000 vehicles. It expects that acceleration to be driven by brisk sales of its new ET5 Touring vehicle and ES8 SUV, which both launched earlier this year, as well as the upcoming debut of its midsize EC6 SUV in September.

That rosy outlook implies Nio's growth will accelerate significantly in the second half of the year, and that it still has a shot at meeting analysts' expectations for revenue to rise 30% to 64.23 billion yuan ($8.81 billion) for the full year. Based on that forecast, Nio's stock looks dirt cheap at 2 times this year's sales. By comparison, Tesla -- which is expected to generate 22% sales growth this year -- trades at about 8 times that metric. 

But its vehicle margins are shrinking

Nio's sales might stabilize in the third quarter, but the ongoing pricing war across China's EV market -- which was exacerbated by Tesla's price cuts over the past year -- are still crushing its margins. Nio's vehicle margin dropped from 20.1% in 2021 to 13.7% in 2022, then fell to 5.1% in the first quarter of 2023.

That figure rose to 6.2% in Q2 as Nio ended some discounts for older ES8, ES6 and EC6 vehicles, but that still marked a steep drop from 16.7% a year ago. By comparison, Nio's domestic rival Li Auto, which produces plug-in hybrid electric vehicles (PHEVs), ended its second quarter with a vehicle margin of 21.3%.

While Nio's vehicle margins stay in the single digits, its operating costs are surging as it expands its capital-intensive Power Swap network. That's why analysts expect the company's net loss to widen from 14.56 billion yuan in 2022 to 22.31 billion yuan ($3.1 billion) this year. The high debt-to-equity ratio of 4.7 could also make it tough to raise fresh cash at favorable rates. But Nio still had 31.5 billion yuan ($4.32 billion) in liquidity at the end of the second quarter, so its coffers won't run dry anytime soon.

Is it too late to invest in Nio?

Nio's low valuation should limit the stock's downside potential, but I don't expect shares to rally until deliveries stabilize and vehicle margins rise again. That said, Nio is still producing more vehicles than smaller U.S. EV makers like Lucid or Rivian, and its battery swap network could lock in a lot of drivers while widening its moat against other EV makers.

In short, I don't think it's too late to buy Nio -- but investors will need to tune out a lot of near-term noise and focus on its long-term growth.