China-based EV maker NIO Inc. (NIO) develops five-, six-, and seven-seater electric SUVs, and smart electric sedans. Its shares have risen 212.5% over the past year on investors’ optimism surrounding the company’s recent deployment of Power Swap stations 2.0 and the commencement of  construction of its new plant in Xinqiao Industrial Park in Hefei.

However, NIO’s stock price has fallen 6.6% year-to-date amid a broader sell-off of Chinese companies trading in the U.S. stock markets, precipitated by the Chinese government’s crackdown on ride-hailing app provider Didi Global Inc. (DIDI). NIO’s  stock closed yesterday’s trading session at $45.53, 32% below its 52-week high of $66.99.

Also, its shares are down 22.7% over the past six months. Although the overall demand for its products remains strong, it continues to have a difficult time weathering supply constraints because of the global semiconductor chip shortage. With a possible slowdown in production in the offing, investors are nervous that it could be difficult for NIO to meet its 21,000 – 22,000 vehicle delivery outlook for the second quarter of 2021.

Click here to checkout our Electric Vehicle Industry Report for 2021

Here is what we think could influence NIO’s performance in the near term:

Challenges Due to Chip Shortage

The semiconductor-chip-reliant automotive industry has  been hit hard by a global semiconductor shortage. As supply struggles to keep up with  growing demand, automakers have been forced to shut down plants or slow their production. NIO expects the chip shortage to drag down its vehicle deliveries in the second quarter. Furthermore,  a fire at a Japanese chip factory in March has aggravated the existing shortfall and hit the company’s supply chain. Since the chip shortage could dampen its vehicle deliveries in the near term, NIO’s  shares may take a bigger hit in the coming months.

Volatile Environment for US-listed Chinese Companies

With Beijing stepping up its efforts to crackdown on listings of Chinese companies in the United States, the risk of owning shares of popular Chinese companies is weighing heavy on investors. After ride hailing giant DIDI became the latest target of regulatory scrutiny, investors are wary. President Xi Jinping’s attempts to tighten oversight of Chinese companies’ overseas listings could mean choppy waters for NIO’s shares in the near term.

Bleak Financials

While NIO’s total revenue for the first quarter, ended March 31, 2021, came in at RMB7,982.3 million ($1,218.3 million), representing an 481.8% year-over-year increase. The company reported a RMB295.9 million ($45.2 million) loss from operations. Moreover, its selling, general and administrative expenses rose 41.1% year-over-year to RMB1,197.2 million ($182.7 million). NIO’s net loss surged 183% from its year-ago value to RMB 4,875.0 million ($744.1 million) over this period. Its loss per ADS came in at RMB3.14 (US$0.48), representing an 89.2% increase year-over-year.

The company’s 15.7% trailing-12-month gross profit margin is 54.5% lower than the 34.6% industry average. Its  trailing-12-month ROE, ROA and ROTC are negative 93.4%, 14.3% and 7.9%, respectively. And its 0.6%  trailing-12-month asset turnover ratio  is 38.9% lower than the 1% industry average.

Stretched Valuation

In terms of forward Price/Sales, NIO is currently trading at 13.68x, which is 894.4% higher than the 1.38X industry average. Its 17.48 forward Price/Book multiple is 366.8% higher than the 3.75 industry average. Also, NIO’s 249.62x trailing-12-month Price/Cash flow ratio is significantly higher than the 11.64x industry average.

Consensus Price Target Indicates Potential Downside

Currently trading at $45.53, Wall Street analysts expect NIO to hit $41.55 in the near term, indicating a potential 8.7% downside.

Unfavorable POWR Ratings

NIO has an F overall rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by 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. NIO has a D grade for Value and Quality. The stock’s 12.89x EV/Sales ratio, which is 726.9% higher than the 1.56x industry average, is in sync with the Value grade. Also, NIO’s negative profit margin justifies the Quality grade.

In terms of Stability grade, NIO has an F. This is consistent with the stock’s five-year monthly beta of 2.54.

Beyond the grades we’ve highlighted, one can check out additional NIO ratings for Sentiment, Growth, and Momentum here.

NIO is ranked #47 of 57 stocks in the C-rated Auto & Vehicle Manufacturers industry.

There are several top-rated stocks in the same industry. Click here to view them.

Click here to check out our Automotive Industry Report for 2021

Bottom Line

NIO’s increasing investment in battery swapping stations and EV charging facilities has enabled the stock to gain significantly over the past year. However, the stock has dipped 6.6% so far this year. A volatile macro environment as Beijing widens clampdown on domestic companies that are listed on the U.S. exchanges and  significant operational challenges due to the global chip shortage could  cause the EV maker’s shares to retreat.  Thus, we think the stock is best avoided for now.

NIO shares fell $45.53 (-100.00%) in premarket trading Monday. Year-to-date, NIO has declined -6.07%, versus a 17.15% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

More Resources for the Stocks in this Article