I’ve steered clear of NIO (NYSE:NIO) stock until now.
With the benefit of hindsight, that was a wise decision. Although the electric vehicle (EV) maker enjoyed a magnificent stock market rally during the pandemic, it’s been stuck in reverse gear over the years since.
Today, the NIO share price has fallen below its IPO price at under $5.50. This might look cheap, but I need to decipher whether the stock’s a genuine bargain buy or if topsy-turvy financial results point to further challenges ahead.
Mixed signals
It’s hard to draw firm conclusions from NIO’s recent earnings report. The company’s still an unprofitable enterprise. It posted a net loss of $776.4m in the final quarter. The full-year deficit stands at a whopping $2.9bn.
Those numbers don’t immediately fill me with confidence. However, it’s worth remembering that Tesla‘s first full-year profit took 18 years to materialise. NIO isn’t even a decade old yet.
Full-year vehicle deliveries increased over 30% year on year, eclipsing 160,000 for the first time. But this number deserves scrutiny too. Although the trajectory looks promising, sales came in well below the firm’s original target.
Perhaps the biggest cause for concern is NIO’s weak gross margin. At 5.5%, it’s almost half what it was in 2022. By contrast, domestic competitor Li Auto had a much healthier 22.2% gross margin last year and for Tesla the figure was 18.2%.
Nonetheless, there have been eye-catching recent developments. A substantial cash injection from the closing of a strategic investment by UAE-based fund CYVN and the launch of its hyper-premium ET9 flagship sedan are notable highlights.
The big picture
Much has been written about the long-term growth potential of the EV market both in China and the wider world. Emissions reduction targets and government incentives continue to act as structural supports for NIO stock and other EV shares.
That said, there are signs the boom is slowing in the company’s home market. According to Fitch Ratings, Chinese EV sales are expected to grow 20% this year, down from 30% in 2023. Moreover, competition in the sector is increasingly cutthroat and the price war between carmakers is escalating.
There’s no doubt the new ET9 is a luxurious product. Yet, I’m worried that NIO’s strategy to launch its most expensive car to date amid wider fragility in the world’s second-largest economy might be a mistimed step as consumers look for cheaper models.
Beyond the slowdown in EV demand, there are further challenges for the NIO share price from the brutal stock market sell-off that has affected the vast majority of Chinese and Hong Kong shares. State-backed intervention has rekindled some confidence, but major risks remain.
Will I be buying?
NIO shares look far more tempting to me at today’s price than they did at sky-high levels around $62 during the pandemic. The price-to-sales (P/S) ratio around 1.2 also looks particularly reasonable compared to the wider sector.
However, I still have serious concerns about the company’s margins and premium product strategy in addition to a reluctance to buy Chinese stocks at present.
I won’t be investing today, but investors who buy into the company’s vision may wish to consider doing so while the stock trades near a 52-week low.
