NIO: Don't Buy The Drop

Andy Feng

EV stocks surged higher this twelvemonth arsenic investors hoped for nan Chinese system to reopen. NIO Inc. (NYSE:NIO) and different EV companies powerfully successful January, but person precocious surrendered astir of those gains arsenic fundamentals and caller developments changed nan outlook for nan industry.

Tesla Inc. (TSLA) is expanding nan unit connected nan EV title successful China by precocious lowering prices for its astir celebrated electrical conveyance models, which could lead to different EV companies pursuing Tesla's lead.

I judge that investors are still excessively optimistic astir nan prospects successful nan electrical conveyance industry, China reopening aliases not and I proceed to deliberation that NIO's banal is astir apt reasonably weighted astatine astir $10.

Hence, I would be aware investors against buying nan driblet successful NIO's stock. Slowing growth, accumulation issues arsenic good arsenic ADR de-listing consequence played a cardinal domiciled successful driving NIO's banal to ~$10. With that said, a caller group of challenges has cropped up that I deliberation will curtail NIO's upside potential.

A Look At The Chart Profile

A $10,000 finance successful NIO made a twelvemonth agone is now only worthy $4.3K, representing a 57% decline. The diminution successful NIO's banal value has been precipitated by a mates of interconnected influential factors that investors pursuing nan EV assemblage are good alert of: Covid lockdowns, primarily, but besides secondary reasons specified arsenic supply-chain issues and a driblet successful request for electric-vehicles. The past facet successful peculiar has been a awesome catalyst for NIO's downswing since January.

From a method floor plan perspective, NIO collapsed retired supra nan 50-day moving mean statement successful January which was a bullish awesome successful nan short term, but nan banal has precocious collapsed done nan 50-day moving average, lending caller downside momentum to NIO. According to nan Relative Strength Index, nan banal is adjacent to being oversold.

Moving Averages (Stockcharts.com)

NIO Deliveries And Resetting Of Growth Expectations

NIO had a very difficult twelvemonth successful 2022, contempt a bully rebound successful transportation growth, peculiarly successful nan past 2 months of nan year.

NIO delivered 15,815 electric-vehicles successful December, representing a 50.8% YoY maturation rate. But NIO delivered conscionable 8,506 electric-vehicles successful January 2023, indicating that nan electric-vehicle assemblage is taking a important request hit.

Even though nan December maturation complaint of 50.8% appeared to beryllium rather robust, NIO's transportation maturation has slowed dramatically passim 2022. Last year, NIO delivered 122,486 electric-vehicles successful total, reflecting conscionable 34.0% YoY growth, but conscionable a twelvemonth earlier NIO achieved a maturation complaint of 109.1% and delivered 91,429 electric-vehicles. In nan twelvemonth anterior to that, successful 2020, nan transportation maturation complaint was 112.6% YoY and nan institution delivered 43,728 electric-vehicles successful total.

NIO's yearly transportation maturation has truthful slowed from triple digits successful 2020 and 2021 to conscionable 34% successful 2022 amid a slew of challenges including mill closures, Covid-19 outbreaks and a messed up supply-chain.

The EV assemblage besides has go a overmuch much crowded section successful 2022 and Tesla is challenging companies for illustration NIO successful their location marketplace pinch fierce value cuts. Thus, a slowdown successful transportation maturation must beryllium expected successful 2023 and NIO whitethorn very good spot little margins arsenic a consequence.

I deliberation a renewed informing astir slowing maturation and softer margins is successful bid because China is reopening its system and immoderate investors whitethorn pin their hopes connected a beardown betterment successful EV sales/deliveries which I conscionable don't see.

Even though I deliberation location mightiness beryllium immoderate stimulus for Chinese EV companies from a reopening successful nan short-term, nan broader image points to much unit connected nan sector, peculiarly because of Tesla's caller pricing strategy (see pursuing section). NIO is still losing a batch of money each quarter, a business which could beryllium made worse by Tesla.

NIO's profit margins were antagonistic 32% successful 3rd 4th and I uncertainty that nan profit business has overmuch improved successful nan 4th quarter. Tesla's pricing strategy whitethorn adhd further profit unit for NIO, peculiarly if nan institution is forced to besides little its prices.

Quarterly Profit Margin (YCharts)

Tesla's Price Decreases For Popular Models Could Result In A Price War In The EV Sector, Suppressing Valuations

Sluggish request for electric-vehicles appears to beryllium a bigger rumor than investors judge correct now, which isn't surprising. NIO is simply a maturation company, and investors successful sexy maturation companies ne'er want to perceive that maturation is slowing.

The request slump is made worse by industry-leader Tesla which announced successful January that it is slashing prices for nan celebrated Tesla Model Y and Model 3 to counteract falling request for electric-vehicles. Prices for these models are dropping by 6.0-13.5%, which is expected to boost Tesla's EV income successful China.

Demand for electric-vehicles is slowing, successful portion because Beijing is discontinuing cash subsidies for EV purchases, a argumentation that has allowed EV companies to waste much vehicles than they would person otherwise.

A stronger bargaining position for buyers and a amended worth connection from Tesla could put unit connected different EV companies, for illustration NIO, to travel suit, perchance igniting an EV value warfare that only nan strongest and astir profitable companies tin win.

Premium Valuation Is Not Deserved

EV investments were basking successful 2020 and 2021, but they are nary longer, which is why NIO is down 84% from its all-time high.

Having said that, NIO's income imaginable is presently weighted astatine a income aggregate of 2.5x, which I judge is excessive fixed NIO's slowing income growth, rising competitory pricing pressures, and nan disappearance of EV subsidies successful China.

XPeng Inc. (XPEV) is trading astatine a income aggregate of 1.7x whereas BYD Company Limited (OTCPK:BYDDF) trades astatine 1.8x sales. There are differences successful size and marketplace predisposition for these companies, but broadly speaking, comparable EV companies are trading astatine little income multiples than NIO.

The income aggregate is besides excessive, successful my view, peculiarly because NIO is not profitable and continues to station alternatively ample losses. NIO is galore years distant from profitability and nan institution posted a 3Q-22 nett nonaccomplishment of RMB4.1 cardinal (US$577.9 million) successful nan 3rd quarter. I americium besides skeptical of NIO's valuation successful ray of Tesla's value actions which are creating much income unit for NIO.

PS Ratio (YCharts)

Why NIO Might See A Higher Stock Price

There is simply a chance that request for electric-vehicles will resurface, possibly successful nan discourse of China's reopening, but this would astir apt not reside nan rumor of rising electric-vehicle prices and nan anticipation of a value warfare successful nan EV sector.

There is besides nan consequence of ongoing accumulation bottlenecks, arsenic location are still immoderate supply-chain issues that plague nan sector. Considering NIO's precocious income valuation, I deliberation nan risk/reward tradeoff is unappealing.

My Conclusion

The taxable of a expansive reopening of nan Chinese economy, which sparked immoderate liking successful EV stocks successful January, does not clasp up nether scrutiny. The truth is that NIO's income maturation has slowed importantly past twelvemonth and will astir apt proceed to slow arsenic nan Chinese EV manufacture develops.

Tesla's value cuts for its astir successful models successful China show that nan U.S. institution is facing a request problem, and nan value cuts were implemented to thrust income that would not person occurred astatine a higher value point. If nan value warfare spirals retired of control, NIO will person to woody pinch moreover slower transportation and income maturation moving forward.

With a P/S-ratio of 2.5x, I proceed to judge that NIO's maturation imaginable is overvalued, and I would counsel against investing. The adjacent worth is still astir $10.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

A financial interrogator and avid investor pinch a keen oculus for invention and disruption, arsenic good arsenic maturation buy-outs and worth stocks. Keeping an oculus connected nan gait of precocious tech and early maturation companies, I constitute astir existent events and nan biggest news surrounding nan industry, and strive to supply readers pinch ample investigation and finance opportunities.