Investors have been bearish about NIO Inc. (NIO) due to its declining market share, widening losses, and a sharp slowdown in deliveries. The stock is expected to plunge further as it grapples with headwinds, including still-high inflation, stiff competition in the EV space, and strict government regulations.

The EV stock has been on a downward trajectory so far this year and hit its 52-week low of $7 on June 1, 2023. Given its weak fundamentals and dim growth outlook, NIO is best avoided now. In this piece, I have discussed several reasons why investing in this auto stock could be extremely risky.

The Chinese EV marker NIO reported revenue of $1.55 billion in the first quarter of 2023, missing analysts’ estimates by $80 million. The company’s adjusted net loss and adjusted net loss per ADS widened 216.9% and 217.7% to $604 million and $0.36, respectively.

NIO is known for selling a broad range of electric SUVs and sedans. While the company significantly ramped up its vehicle deliveries over the past five years, it suffered a sharp slowdown last year as it grappled with COVID-19 restrictions in China, supply chain disruptions, material inflation, and other macro challenges.

Many of these headwinds subsided in 2023, however, NIO’s deliveries still declined about 23% sequentially during the first quarter. The company delivered just 6,658 vehicles in April 2023 and 6,155 vehicles in May 2023, which are considerably lower than the record-high of 15,815 vehicles delivered in December 2022.

The EV maker provided revenue guidance for the the second quarter of 2023. For the quarter, NIO expects its deliveries to be between 23,000 and 25,000 vehicles, down 0.2%-8.2% from a year ago, and the company’s total revenue is expected to arrive between $1.27 billion and $1.36 billion, a decline of 9%-15% year-over-year.

Furthermore, another major issue for the company is its vehicle margin, which is being affected by the pricing war in China’s EV market. EV giant Tesla Inc. (TSLA) sparked a price war this year in a fight for market share as auto demand slumps. The EV price war has been joined by more than 40 auto brands operating nationwide.

As auto price market war appears to be escalating in China, NIO slashed prices by approximately $4200 for all models, including its revamped ES6 and ES8 sports utility vehicles. This equates to a discount of up to 9% on Nio vehicles.

Shares of NIO have declined 25.2% over the past six months and 51.5% over the past year to close the last trading session at $9.05. The stock is currently trading 63% below its 52-week high of $24.43, which it hit on June 27, 2022.

Here are the factors that could affect NIO’s performance in the upcoming months:

Disappointing Financials

For the first quarter that ended March 31, 2023, NIO’s revenues were $1.55 billion, an increase of 7.7% year-over-year but a 33.5% decline from the fourth quarter of 2022. The company’s gross profit came in at $23.60 million, down 88.8% from the same period in 2022. Its vehicle margin for the quarter was 5.1%, compared to 18.1% in the prior-year quarter.

Furthermore, NIO’s adjusted loss from operations worsened 163.6% from the year-ago value to $658.50 million. The company’s adjusted net loss widened 216.9% year-over-year to $604.30 million, while its adjusted net loss per ADS worsened 217.7% from the prior year’s quarter to $0.36.

Unfavorable Analyst Estimates

Analysts expect NIO’s revenue for the second quarter (ending June 2023) to decline 11.1% year-over-year to $1.31 billion. Also, the company’s loss per share is expected to widen by 78.3% year-over-year to $0.43 for the same period. Moreover, it failed to surpass the consensus EPS estimates in each of the trailing four quarters, which is disappointing.

Furthermore, the company is expected to incur massive losses for at least two fiscal years.

Low Profitability

NIO’s trailing-12-month gross profit margin of 7.80% is 77.8% lower than the industry average of 35.15%. Likewise, the stock’s trailing-12-month EBITDA margin and net income margin of negative 30.74% and negative 35.05% stand out in contrast to the industry averages of 10.90% and 4.28%, respectively.

In addition, the stock’s trailing-12-month ROCE, ROTC, and ROTA of negative 65.49%, negative 20.77%, and negative 19.63% compare to the industry averages of 10.19%, 6.10%, and 3.64%, respectively.

Stretched Valuation

In terms of forward EV/Sales, NIO’s 1.63x is 39.7% higher than the 1.16x industry average. Its forward Price/Sales of 1.63x is 86.4% higher than the 0.88x industry average. Also, the stock’s forward Price/Book multiple of 9.61 is 276.6% higher than the industry average of 2.55.

POWR Ratings Reflect Bleak Prospects

NIO’s overall F rating translates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NIO has a D grade for Growth and an F for Sentiment, in sync with its poor financials and disappointing analyst estimates. Also, the stock has an F grade for Stability. Its 24-month beta of 1.17 justifies its Stability grade.

In addition, NIO has a D grade for Quality, consistent with its lower-than-industry profitability.

NIO is ranked #52 out of 58 stocks in the Auto & Vehicle Manufacturers industry.

Beyond what I have stated above, we have also given NIO grades for Value and Momentum. Get all NIO ratings here.

Bottom Line

Automotive and EV maker NIO’s stock has been on a downward trajectory so far this year and hit its 52-week low of $7 this month. Mounting losses and a significant slowdown in vehicle deliveries remain primary concerns for the company.

Furthermore, the company’s vehicle margins are expected to get squeezed as it recently announced prices cuts amid escalating EV price way in China. Given its underwhelming financial performance, low profitability, elevated valuation, and bleak growth prospects, we think it could be wise to avoid this auto stock now.

Stocks to Consider Instead of NIO Inc. (NIO)

The odds of NIO outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three stocks rated A (Strong Buy) from the Auto & Vehicle Manufacturers industry instead:

Suzuki Motor Corp. (SZKMY)

Subaru Corp. (FUJHY)

REV Group, Inc. (REVG)

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

3 Stocks to DOUBLE This Year >

NIO shares rose $0.02 (+0.22%) in premarket trading Thursday. Year-to-date, NIO has declined -7.28%, versus a 14.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

More Resources for the Stocks in this Article