Nio Stock: Buy, Sell, or Hold?

Nio's (NIO 0.38%) stock surged 12% on May 1 after the Chinese electric-vehicle maker posted its latest delivery numbers. In April, it delivered 15,620 vehicles, representing 135% growth from a year ago and 32% growth from March.

That acceleration indicated that Nio's business was stabilizing, but its stock still trades 16% below its initial public offering (IPO) price of $6.26 per American depositary receipt. Let's review the main reasons to buy, hold, and sell Nio's stock to see if it's a contrarian play on the EV market.

Image source: Nio.

The main reasons to buy or hold Nio's stock

Nio sells a broad range of electric SUVs and sedans, but it differentiates itself from its competitors with its swappable batteries. For a subscription fee, drivers can swap out their depleted batteries for fully charged ones at its battery-swapping stations. That strategy addresses the lengthy charging times for traditional EVs.

Nio's deliveries rose 81% in 2019, 113% in 2020, and 109% in 2021. However, its deliveries increased only 34% in 2022 and grew 31% to 160,038 vehicles in 2023. That slowdown -- which Nio blamed on supply chain constraints, poor weather conditions in certain regions, macro headwinds, and the pricing war across China's EV market -- drove away the bulls. Its vehicle margin also dropped from its all-time high of 20.2% in 2021 to 9.5% in 2023 as it slashed its prices.

But in the second half of 2023, Nio's deliveries climbed above 50,000 per quarter. Its vehicle margins also expanded sequentially for three consecutive quarters.

Data source: Nio. YOY = Year over year.

Nio won't report its first quarter earnings until late May or early June, but its delivery updates for the first four months of 2024 suggest its deliveries are stabilizing.

Data source: Nio.

Based on these numbers, we know that Nio's deliveries declined 3% year over year in the first quarter of 2024. However, its growth in April suggests it's off to a strong start for the second quarter. If Nio maintains its pricing power in China's crowded EV market, its vehicle margin could continue to expand in the first half of 2024.

For the full year, analysts expect Nio's revenue to increase 18%, compared to its 13% growth in 2023. That acceleration suggests it's gradually overcoming its near-term challenges, and its stock looks dirt cheap, being about equal to this year's sales. By comparison, Tesla trades at six times this year's sales.

The main reasons to sell Nio's stock

Nio's sales might be stabilizing, but it's still deeply unprofitable. Its annual operating loss nearly doubled from 10.8 billion yuan ($1.5 billion) in 2019 to 20.3 billion yuan ($2.8 billion) in 2023, and it's expected to bleed more red ink in the future.

Even if Nio's vehicle margin improves, its operating margin could shrink as it builds more battery-swapping stations and it expands overseas. It also recently launched its own smartphone that can be used with its own vehicles.

Nio still held 57.3 billion yuan ($8.1 billion) in cash, cash equivalents, and short-term investments at the end of 2023, so it won't go bankrupt anytime soon. However, its high debt-to-equity ratio of 3.4 could make it tough to raise fresh cash at reasonable rates.

Nio's persistent losses and high leverage could limit its gains as long as interest rates stay elevated. The escalating tensions between the U.S. and China could exacerbate that pressure by driving investors away from most Chinese stocks.

Is it the right time to buy, sell, or hold Nio's stock?

I think Nio's downside potential is limited, so there's no clear reason to sell the stock right now. However, its near-term gains could also be capped until it stabilizes its operating margins and value-seeking investors embrace Chinese companies again.

Nio's stock could stay in the penalty box, but it makes more sense to buy or hold the stock instead of selling it. It's still a speculative EV play, but it's a promising one that's pumping out a lot more vehicles than many of its U.S. counterparts.