BYDDY - NIO: Fell From Grace And Significantly Underperforming (Rating Downgrade)

2023-10-19 09:00:00 ET

Summary

• NIO stock has experienced significant volatility and underperformance compared to its peers in the Chinese EV market.
• China's NEV sales continue to grow, but NIO has been unable to sustain its performance and is struggling to justify its expanded production goals.
• I explain why NIO needs more than a push toward the mass market segment to renew investors' confidence. Its execution in its premium segment has been found wanting all year.
• I argue why NIO's steep plunge of more than 50% from its August highs shouldn't be seen as an astute dip-buying opportunity now. Be prepared for more pain if you buy at the current levels.

NIO Inc. ( NIO ) investors have experienced another wild swing in its price action since my previous update in late August 2023. I had anticipated NIO to be supported by dip buyers looking to capitalize on its plunge from its early August highs. However, buyers lacked conviction, even as they continued to hold the defense line at the $9.5 level through mid-September.

Accordingly, NIO suffered another steep decline in September, in line with the declines seen with its China EV peers, such as Li Auto ( LI ) and XPeng ( XPEV ). However, the stock of China's leading NEV maker, BYD Company ( BYDDF ), held up remarkably well, staying well above its August 2023 lows. As such, the rotation out of NIO and its peers demonstrated that the market is increasingly less optimistic about the prospects of the smaller players, even as China's EV market continues to post record deliveries and NEV penetration rates.

China's NEV sales reached " a record in September , reaching 746K units." Notably, it represented a 22.1% YoY growth and a 4.2% MoM uptick. Retail NEV penetration reached 36.9%, well above September 2022's 31.8%. As such, the secular growth in China's NEVs has not been sustained in NIO's performance, resulting in significant underperformance against its peers.

As seen above, NIO posted a 1Y total return of nearly -36%, well below LI's 73% surge and XPEV's 60% recovery. Therefore, NIO has failed to participate in the recovery from its significant battering in 2022, as it languishes close to the lows last seen in June 2023 (below October 2022 lows). The critical question facing Nio investors moving ahead is whether the underlying demand for its cars is robust enough for the company to boost production to lift its scale.

Keen investors should recall that while Nio posted record deliveries for Q3 at 55.43K vehicles , it came in at the lower end of the company's guidance range of between 55K and 75K deliveries. As such, I believe investors are right to ask tough questions about whether the company's fourth quarter could mark a sharp growth inflection, which is necessary to support its ability to turn profitable

Nio reportedly added " three additional electric drive systems or EDS production lines to prepare for future capacity expansion." The planned capacity could reach an annualized run rate of 1M EDS units, with two of the three lines "scheduled to commence mass production within the current year."

However, what's the point if Nio's underlying demand and deliveries aren't sufficient to justify its expanded production goals? In addition, Nio's Firefly sub-brand is expected to bolster its volume push toward the mass market segment. However, it could also complicate its profitability trajectory, as Nio is not expected to turn profitable on adjusted EBIT terms through FY25. Also, how would the sub-brand affect Nio's premium positioning?

These questions remain unanswered as Nio's execution in its core segment has been found wanting all year. With the company holding $3.84B in cash and equivalents, Nio might have credibility that it doesn't need another $3B in cash infusion, which was rumored in late September.

However, that also depends on whether Nio could continue pushing for significant deliveries growth in FY24/25. As such, I believe investors are looking toward management providing assurances and a more realistic target at its upcoming Q3 earnings call before assessing an upward valuation re-rating.

Despite that, NIO buyers were nowhere to be seen, as it looks close to breaking down below its $7.90 consolidation zone. The bull trap in early August ($16 level) was significant, allowing sellers to rotate out sending NIO down more than 50% from those levels.

With NIO falling below its 50-week moving average or MA (blue line) again, I believe it's time for investors to remain cautious until we glean a validated bullish reversal, corroborating more robust buying sentiments.

The pain in NIO could continue as the market confidence in Nio's strategy and competitive positioning wanes.

Rating: Downgraded to Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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