NIO Inc. (NIO) is a global pioneer and leader in the premium smart electric car industry. It designs, develops, co-manufactures, and distributes premium smart electric cars, advancing next-generation technologies such as autonomous driving, digital technology, electric powertrains, and batteries.

Its shares have declined 54.8% over the past year and 36.3% year-to-date to close its last trading session at $20.18. In addition, the stock is currently trading 56.5% below its 52-week high of $46.38, which it hit on August 10, 2021.

Investors are concerned about NIO’s slowing growth, which is predominantly due to supply chain issues, as well as the return of COVID-19 cases in China. Furthermore, competition in the Chinese EV industry is heating up, with both big players and newer entrants eyeing the vast opportunity.

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

Premium Valuation

In terms of forward Price/Book, the stock is currently trading at 7.94x, 221.6% higher than the industry average of 2.47x. Also, its forward Price/Sales of 3.71x is 294.1% higher than the industry average of 0.94x. Moreover, NIO’s forward Price/Cash Flow of 131.71x is 1252.4% higher than the industry average of 9.74x.

Inadequate Financials

NIO’s revenue increased 24.2% year-over-year to RMB 9.91 billion ($1.56 billion) for the first quarter ended March 31, 2022. Its operating loss grew 639.6% from the year-ago value to RMB 2.18 billion ($345.25 million). The company’s net loss came in at RMB 1.83 billion ($287.89 million). Its loss per share amounted to RMB 1.12.

Negative Profit Margins

NIO’s trailing-12-month gross profit margin of 17.6% is 52.6% lower than the industry average of 37.2%. Also, its trailing-12-month ROA, ROC, and ROE of 8.6%, 7.6%, and 24.8%, compare to its respective industry averages. Moreover, its trailing-12-month negative EBITDA margin of 11.9% compares to its industry average of 12%.

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. NIO has an F for Growth and a D for Stability and Quality. Its disappointing financials justify the Growth grade. The stock beta of 2.17 is consistent with the Stability grade. In addition, poor profitability is in sync with the Quality grade.

Of the 64 stocks in the D-rated Auto & Vehicle Manufacturers industry, NIO is ranked #48.

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

Bottom Line

The Chinese government’s consideration of extending tax benefits and constructing EV charging stations will likely assist the EV manufacturer. However, its dismal financial results and negative profit margins are concerning.

In addition, analysts expect its EPS to decline 142.9% in the current quarter. Moreover, considering the stock looks overvalued at the current price level, we think it is best avoided now.

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

While NIO has an overall F rating, one might want to consider its industry peers, Stellantis N.V. (STLA), Jardine Cycle & Carriage Limited (JCYGY), and Honda Motor Company Ltd. (HMC), which have an overall A (Strong Buy) rating.

NIO shares were trading at $19.87 per share on Tuesday morning, down $0.31 (-1.54%). Year-to-date, NIO has declined -37.28%, versus a -13.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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