Pioneer in the premium smart electric car industry, NIO Inc. (NIO), has been facing challenges in deliveries and supply chain constraints caused by the outbreak of the Omicron coronavirus variant in major cities in China. The company reported a poor third quarter report and has failed to beat the consensus EPS estimates in all the trailing four quarters.

The company’s founder and CEO, William Li, said the company might face a challenging first half of 2023 amid the cut in government subsidies and the broader economic slowdown. Li also pointed out that many buyers rushed to place orders before Chinese EV subsidies expire at year’s end, which indicates month-over-month delivery declines over the next few months.

Also, NIO had earlier cut its delivery outlook for the fourth quarter of 2022 from a previously released outlook of 43,000 to 48,000 vehicles to 38,500 to 39,500. The company delivered 40,052 vehicles in the fourth quarter of 2022.

The stock has declined 69.9% over the past year and 38.2% over the past three months to close its last trading session at $9.75. In addition, the stock is currently trading 70.8% below its 52-week high.

Here’s what could shape NIO’s performance in the near term:

Poor Financials

For the third fiscal quarter ended September 30, 2022, NIO’s gross profit declined 12.9% from the year-ago value to RMB 1.74 billion ($252.13 million). Its total operating expenses increased 87.8% year-over-year to RMB 5.61 billion ($812.90 million).

In addition, the company’s adjusted loss from operations rose 348.6% year-over-year to RMB 3.26 billion ($472.38 million). Its adjusted net loss increased by 514.2% from the previous year’s quarter to RMB 3.50 billion ($507.16 million).

Negative Profit Margins

NIO’s trailing-12-month gross profit margin of 14.43% is 59.52% lower than the industry average of 35.65%. Its trailing-12-month negative EBIT and EBITDA margins of 26.33% and 22.05 compare to its industry average of 7.96% and 11.23%, respectively.

Also, its trailing-12-month ROA, ROC, and ROE of negative 40.68%, 13.28%, and 11.24%, compare to its respective industry averages of 12.81%, 6.59%, and 4.45%.

Premium Valuation

In terms of forward Price/Book, the stock is currently trading at 4.23x, 65.1% higher than the industry average of 2.56x. NIO’s forward EV/Sales multiple of 1.90x is 71.5% higher than the industry average of 1.11x. Also, its forward Price/Sales multiple of 2.17x is 157.5% higher than the industry average of 0.84x.

POWR Ratings Reflect Bleak Outlook

NIO has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. The stock’s 24-month beta of 1.11 is consistent with the F grade in Stability. Its D grade in Growth is justified by its poor financials. Moreover, its negative profit margins are in sync with its D grade for Quality.

Of the 61 stocks in the D-rated Auto & Vehicle Manufacturers industry, NIO is ranked #51.

Beyond what I’ve stated above, you can view NIO ratings for Value, Momentum, and Sentiment here.

Bottom Line

Like most Chinese companies, NIO’s growth has been affected due to supply chain issues and the soaring COVID-19 cases. Moreover, the stock is trading below its 50-day and 200-day moving averages of $11.01 and $16.81, respectively.

Considering the grim global outlook for the year, the stock could be best avoided.

How Does NIO Inc. (NIO) Stack up Against Its Peers?

While NIO has an overall POWR Rating of F, one might want to consider investing in other Auto & Vehicle Manufacturers stocks with an A (Strong Buy) rating, such as Isuzu Motors Limited (ISUZY), Subaru Corporation (FUJHY) and Honda Motor Co. Ltd. ADR (HMC), which have an overall A (Strong Buy) rating.

NIO shares were trading at $9.68 per share on Tuesday afternoon, down $0.07 (-0.72%). Year-to-date, NIO has declined -0.72%, versus a -0.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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