Automaker NIO Inc. (NIO) is a manufacturer and seller of smart electric vehicles (EVs) in China. The Shanghai, China-based company offers electric SUVs and smart electric sedans and provides energy and service packages to customers.

NIO’s stock rebounded strongly last week on the backs of China’s Commerce Ministry announcing “a raft of new steps to spur consumer demand for cars.” The ministry stated that it is considering an extended tax break for electric vehicles and plans to build more charging stations. However, COVID-19 cases are once again on the rise in the country, which might cause production disruptions again.

Over the past year, NIO’s stock has declined 54.8% and 35.1% year-to-date to close its last trading session at $20.57. However, it has gained 13.4% over the past month.

Here are the factors that could affect NIO’s performance in the near term:

Bleak First Quarter Results

For the fiscal first quarter that ended March 31, NIO’s total revenues increased 24.2% year-over-year to $1.56 billion. On the other hand, gross profit decreased 6.9% from the prior-year quarter to $228.23 million. Net loss rose 295.2% from the same period the prior year to $281.21 million.

Stretched Valuations

In terms of its forward Price/Sales, NIO is trading at 3.74x, 345.6% higher than the industry average of 0.84x. The stock’s forward Price/Book multiple of 8.08 is 266.2% higher than the industry average of 2.21. In terms of its forward Price/Cash Flow, it is trading at 133.68x, 1,457.9% higher than the industry average of 8.58x.

Bleak Profitability Margins

NIO’s trailing-12-months gross profit margin of 17.64% is 51.9% lower than the industry average of 36.67%. Its trailing-12-months EBITDA margin and net income margin of a negative 11.86% and 19.76% are considerably lower than their respective industry averages of 12.11% and 6.56%.

Its trailing-12-months ROE, ROTC, and ROA of negative 24.76%, 7.58%, and 8.63% compare to their respective industry averages of 17.02%, 7.16%, and 5.63%.

POWR Ratings Reflect Bleak Prospects

NIO’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

NIO has a Growth grade of F in sync with its bleak financial growth in the last reported quarter. The stock also has an F grade for Stability, consistent with its five-year monthly beta of 2.17.

NIO has a D grade for Value, which is justified by its lofty valuations.

In the 66-stock Auto & Vehicle Manufacturers industry, it is ranked #60. The industry is rated D.

Click here to see the additional POWR Ratings for NIO (Momentum, Quality, and Sentiment).

View all the top stocks in the Auto & Vehicle Manufacturers industry here.

Bottom Line

China’s consideration to extend tax exemptions and build EV charging stations is expected to benefit the EV-making company. However, its bleak financials and negative profit margins are concerning.

Moreover, COVID-19 cases are on the rise in the country again, and the identification of a new subvariant might impact NIO’s operations. Hence, I think the stock might be best avoided now.

How Does NIO Inc. (NIO) Stack Up Against its Peers?

While NIO has an overall POWR Rating of F, one might consider looking at its industry peers, Honda Motor Co., Ltd. (HMC) and Isuzu Motors Limited (ISUZY), which have an overall A (Strong Buy) rating, and Mazda Motor Corporation (MZDAY) and Subaru Corporation (FUJHY), which have an overall B (Buy) rating.

NIO shares were trading at $20.99 per share on Tuesday morning, up $0.42 (+2.04%). Year-to-date, NIO has declined -33.74%, versus a -18.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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