Recent Developments:
NIO released its latest quarterly earnings on March 5, surpassing revenue consensus estimates but missing EPS estimates. Revenue remained flat in Q4 2023, while adjusted EPS improved from -$0.52 to -$0.44, marking the tenth consecutive quarter of missed EPS targets. For the full FY 2023, NIO delivered a 9.7% revenue growth, which significantly lags behind the 38% expansion of the Chinese EV market during the same period.
NIO’s delivery growth of 30% in 2023 also falls short of the broader EV market’s expansion, as rivals such as Li Auto (182%), Tesla (33%), Mercedes-Benz (94%), and BMW (138%) all outperformed NIO. This indicates a steady erosion of NIO’s market share.
The start of 2024 has been even more challenging for NIO, with Q1 deliveries declining by about a thousand units compared to Q1 2023. While Li Auto delivered over 80 thousand vehicles with a 53% YoY growth, even XPeng, which faces fundamental challenges, demonstrated a 20% YoY growth in Q1 2024. The Chinese EV market as a whole grew by 14.7% YoY during the same period, further highlighting NIO’s loss of market share.
Cash Burn and Financial Health:
As NIO continues to burn cash, it has limited options but to raise new funds. Consequently, the company’s total debt and share count have surged over the past two years. Consensus estimates do not anticipate the EPS turning positive until 2027, suggesting that the trend of increasing leverage and share count is likely to continue over the next several quarters.
Unsustainable Business Model:
Despite impressive revenue growth since 2020, NIO’s gross profit has stagnated, and its operating income has declined sharply. In contrast, competitors like Li Auto demonstrate a positive relationship between revenue growth and profitability, indicating a more sustainable business model.
Industry Trends and Tesla’s Challenges:
Current industry trends are also unfavorable for NIO, as evidenced by Tesla’s Q1 earnings report. As the most technologically advanced EV company in the world, Tesla’s mere 3.5% YoY revenue growth in Q1 and its failure to meet consensus revenue estimates suggest that the EV industry is facing challenges. In such an environment, weaker players like NIO are likely to encounter even greater difficulties.
Valuation and Risks:
NIO’s valuation ratios have moderated, with price-to-sales ratios falling below one. However, discounted cash flow analysis suggests the stock is 41% undervalued, but this discount is considered fair given NIO’s fundamental weaknesses. The risks highlighted in this analysis, including the company’s market share loss and unsustainable business model, suggest a possibility of NIO going out of business within the next several years if it fails to find a path toward profitability.
While NIO is backed by an investment vehicle from Abu Dhabi, the government’s support does not eliminate the company’s fundamental challenges. Sentiment in the EV industry and news events like economic growth or improved geopolitical situations could temporarily lift NIO’s share price, but these factors do not address the company’s underlying problems.
Bottom Line:
NIO faces a multitude of challenges, including declining market share, cash burn, and an unsustainable business model. While the stock’s valuation may appear attractive, the significant risks associated with NIO outweigh its upside potential.
Therefore, NIO is downgraded to “Strong Sell”.
