2023-06-06 10:00:00 ET
Summary
- NIO has underperformed our expectations, both in stock performance and delivery numbers, likely attributed to its premium strategy and transition to NT2.0.
- Its cash burn may accelerate ahead, as it seeks to enter the mass market through two sub-brands by H2'24, worsened by its lack of economies of scale.
- It appears that NIO's previous guidance of 250K EV output by FY2023 and breakeven by FY2024 may have been too ambitious indeed.
- Anyone looking to add the stock here must be ready for short-term underperformance in our view.
The NIO Investment Thesis Needs To Be More Compelling
NIO Inc. (NIO) has delivered disappointment again and again, with May 2023 only delivering 6.15K EVs ( -7.6% MoM / -12.3% YoY ). While part of the headwinds may be attributed to the transition to NT2.0 and the resurgence of COVID-19 cases in China, it is apparent that its competitors do not face the same demand destruction.
For example, BYD ( BYDDF ) delivered 240.22K units in May 2023 (+14.2% MoM/ +110.5% YoY ), while XPeng ( XPEV ) reported 7.5K (+6% MoM/ -25.8% YoY) and Li Auto ( LI ) reported 28.22K (+10.1% MoM/ +145.6% YoY ).
Tesla's ( TSLA ) price war has also worked in its favor, with the automaker similarly recording an increase in its China-based sales to 39.95K units (-47.8% MoM/ +306.8% YoY ) in April 2023, likely attributed to its attractive pricing of 263.9K yuan for the Model Y and 231.9K yuan for the Model 3.
This cadence suggests that NIO is rapidly losing market share, as its competitors eat the former's lunch in the intensely competitive EV market, with the retail and wholesale EV sales in China expected to decelerate ahead.
Therefore, while the automaker already scored 30K pre-orders for ES6 within three days of launch, we are uncertain about its eventual success, due to the model's higher price range of 368K and 426K yuan.
Combined with the cumulative delivery of 43.83K YTD, the NIO management may need to aggressively ramp up output and delivery by H2'23 to achieve its aggressive FY2023 volume guidance of 250K . Otherwise, more realistically, we may see the management lower its guidance yet again, as it did previously in December 2022 . Assuming so, we may see another downward pressure on its stock price indeed.
The automaker also boasts an overcrowded playbook with four premium sedan options and three premium SUV options, on top of the EVE and EP9 ambitions. This cadence has consistently impacted its gross margins to 10.5% over the last twelve months (-8.4 points YoY), while similarly expanding its R&D expenses to $1.54B (+116.1% YoY).
Despite the minimal profitability thus far, NIO is also planning to enter the mass market EV segment by H2'24 with two sub-brands, "Firefly" and "Alps," at the target sales prices of between 200K and 300K yuan, a notable discount of ~50% from its current offerings.
With a “critical phase in research and development," we may see the automaker's operating margins worsen from the last reported at -31.7% (-19.4 points YoY).
NIO's cash burn may also accelerate to ~$175M quarterly, due to the increased capital expenditures from new initiatives (likely to include the new solid-state batteries, mass-market R&D, new showrooms/ clubhouses, and service centers), as previously highlighted in the FQ4'22 earnings call:
Regarding the investment for the new strategic -- for the strategic new businesses, for the full year, we estimate that this will be around RMB 4 billion to RMB 5 billion. So, if we break it down, then it means that probably around RMB 1 billion every quarter. ( Seeking Alpha )
Therefore, while we applaud the diversified pricing strategy, we are highly skeptical of the NIO management's ambitious guidance of break-even by FY2024, due to the impacted deliveries thus far.
Combined with the reduced output of 122.48K in FY2022 and planned 250K output in FY2023, compared to the installed capacity of 600K units, it is unsurprising that the automaker has yet to achieve a satisfactory economy of scale thus far.
So, Is NIO Stock A Buy , Sell, or Hold?
NIO 5Y Stock Price
Based on the downward trend thus far, it appears NIO is likely to break the IPO support level to hit the $5s in the near term, implying a -30% downside from current levels. This conjecture is not too bearish indeed, since its FQ2'23 guidance may disappoint due to the factors discussed above.
NIO YTD EV/Revenue
The same pessimism is also embedded in the NIO's NTM EV/ Revenues of 0.91x, moderated against its 1Y mean of 1.13x and its peer's NTM EV/ Revenues, such as LI at 1.41x, XPEV at 1.07x, and BYDDF at 1.05x.
As a result, while we personally admire the handsome features offered by the automaker's SUV models, the stock no longer looks convincing at these levels. In addition, the stock has yet to find a sustainable bottom attributed to the underperformance and impacted margins thus far.
Anyone looking to add NIO here must also be prepared for more volatility, in our view, due to the elevated short interest of 7.89%, despite the -57.18% decline over the past year. While its long-term prospects appear to be decent, investors must also closely monitor its balance sheet, which has been deteriorating at an accelerated rate of -$2.5B annually.
As a result, we prefer to prudently rate the NIO stock as a Hold (Neutral) here, since it may continue to underperform even at these depressed levels.
Meanwhile, investors with higher risk tolerance may consider establishing a small position at the $5s. Even then, the portfolio must be sized appropriately since the developing geopolitical risks may put downward pressure on the stock prices.
For further details see:
NIO: Penny Range Soon - We Were Wrong