LI - NIO: Back For Another Run

2023-11-09 16:39:29 ET

Summary

• NIO Inc. has slumped back below $8 due to volatile monthly delivery numbers and lack of consistent growth in EV deliveries.
• The company delivered an EV record during Q3 2023, but the recent 10% workforce reduction isn't a great sign for the rest of Q4.
• The stock is cheap, trading back at the lows from earlier in 2023, where NIO doubled to $16 and another similar move is possible.

NIO Inc. ( NIO ) continues to make progress towards record electric vehicle ("EV") production, yet the volatile monthly numbers always hammers the stock. The Chinese EV manufacturer has seen the stock slump again below $8. My investment thesis is again ultra Bullish on the stock after the dip back down to the lows.

Monthly Volatility

The biggest issue still facing NIO is the lack of consistent growth in EV deliveries. The Chinese company reported a record monthly delivery of 20,462 vehicles back in July, but the October delivery rate was down to 16,074 vehicles while the Chinese passenger car sales rose over 10% in the month.

The delivery numbers are less volatile on a quarterly basis due in part to the wild timing of new vehicle releases. In total, NIO has delivered 126,067 EVs this year, up 36% YoY.

The problem for investors is the wild swing in monthly deliveries is even more notable when viewing the switch from SUVs to Sedans and back to SUVs again. The company does very little building on previous monthly sales with the launch of the new ES6 SUV leading to the initial surge starting in May.

Apparently, NIO provided its supply chain with a 2024 sales forecast of more than 230,000 units . The company is on target to reach ~156,000 EV deliveries in 2023 suggesting a 50% growth rate next year.

Investors should be cautioned that NIO has entered the last couple of years with goals for reaching a 200K+ figure with no actual results matching the estimates. The company even discussed recently needing to boost the sales reps to reach a monthly vehicle sales target of 30K units.

The disconnect is interesting considering the goal is only to average 20K units a month in 2024. In addition, NIO recently added 15 showrooms to reach 139 NIO Houses and 314 NIO Spaces.

Other Chinese EV companies like Li Auto ( LI ) and XPeng ( XPEV ) are targeting higher figures for 2024, leading the competitive headwinds in the market. XPeng targets 280,000 EV deliveries while Li Auto targets 800,000.

10% Cut

NIO announced plans to cut 10% of the staff during November in an exercise to reduce excessive costs. The company adding new showrooms and sales reps to reach a 30K monthly delivery rate would appear to contradict the plans to reduce 10% of a workforce that reached nearly 27K to start 2023.

NIO announced plans expected to save between at least $206 million per year going forward according to Deutsche Bank analyst Edison Yu. The company suggests the battery and phone businesses will face the biggest layoffs.

During the most recent reported quarter, NIO reported an adjusted net loss of $751 million. NIO reported a Q1'23 loss of $604 million on vehicle deliveries of 31,041 during the quarter

NIO hit record vehicle sales during Q3, providing some encouragement the company would cut the loses in the last quarter. The Chinese EV company should report quarterly results in the next couple of weeks with the forecast for sales of $2.66 billion to more than double the Q2'23 level with vehicle deliveries hitting 55K during Q3.

The company ended the quarter with a cash balance of $4.3 billion. Since the end of June, NIO completed the $739 million investment from CYVN Investments and $1 billion in convertible debt.

The news of a 10% workforce reduction only suggests management doesn't expect the business to easily take the next step higher with recent delivery levels dipping. After all, an actual 50% boost in vehicle deliveries during 2024 would provide substantial revenue increases to absorb a lot of the current cost reductions.

Most of the current costs are in the costs of sales category with NIO generating a vehicle margin only in the 6% range. The question is how much of those costs are included in the cuts, though Deutsche Bank only forecasts ~$50 million in quarterly expense cuts from removing 10% of the workforce with a large portion of the costs related to materials for the EV.

The market is currently very negative on the stock while NIO is technically reporting record quarterly delivery numbers. The stock is likely to make another run similar to the recent jump from $8 to $16. The market cap is down to $14 billion while sales are projected to reach $13 billion in 2024, though this number is probably aggressive.

Takeaway

The key investor takeaway is that NIO is appealing on weakness with a market cap below $14 billion and quarterly sales reaching $2.7 billion in Q3'23. The Chinese EV company should ultimately benefit from a rebound in the Chinese economy after most of 2023 has been weaker than expected in rebounding from Covid lockdowns. The stock is remains risky, but NIO remains a solid way to speculate in EV growth and Chinese demand with the stock trading back at the lows.

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