For a long time, I’ve looked at shares of Chinese luxury EV manufacturer NIO (NYSE:NIO) as a high-risk, high-reward way to play the Chinese EV revolution. But, I’ve always maintained that the risks were larger than the rewards and that buying NIO stock was never worth it.
That is especially true today. Last week, NIO reported fourth-quarter numbers. Those numbers were not good. Specifically, they showed that NIO vehicle demand is dramatically slowing at the same time that the competition is ramping. The takeaway? NIO does have exposure to the rapidly booming Chinese EV market. But its share in that market is niche and will ultimately be capped by competition.
That’s why NIO stock has dropped more than 30% since the Q4 report. It’s also why NIO stock will keep falling for the foreseeable future. On a per vehicle basis, NIO stock is still being valued at more than three-fold that of Tesla (NASDAQ:TSLA), and many market participants argue that Tesla stock is overvalued. Further, NIO’s delivery volume is actually declining. If these declines persist, the valuation gap will only widen.
Overall, NIO stock remains a sell. There is a potential long-term upside thesis here. But it is rapidly losing clarity and viability. Instead, the most likely outcome today is that NIO turns into a niche player in the Chinese EV market. Upside in that realistic scenario is already priced in today, meaning further upside in NIO stock in the near term is limited.
Nio’s Q4 Report Was Bad
Heading into the Q4 print, NIO stock was firing on all cylinders thanks to a positive highlight in a 60 Minutes special. From that special to the Q4 report, NIO stock had rallied more than 30%.
The stock has since given up all of those gains and then some. The Q4 report essentially emphasized that while the Chinese EV market is booming, NIO isn’t. Specifically, sequential production growth slowed from greater than 700% in the third quarter, to under 100% in the fourth quarter. Delivery growth slowed from 3,000%-plus to under 150%. Gross margins did flip into positive territory, but they remained anemic around 0.4%. Vehicle margins likewise remained weak around 3.7%.
But, the quarterly numbers weren’t even the worst of it. The worst of it was the update on January and February delivery numbers. ES8 deliveries were just 1,805 in January, and 811 in February, both representative of huge sequential declines from December. Indeed, first=quarter ES8 deliveries are expected to be less than half the fourth-quarter delivery total.
Management is blaming the slowdown on EV subsidy reductions in 2019, a seasonal slowdown surrounding the Chinese New Year and a soft auto sector in China. But, that isn’t what’s really happening. China’s EV market remained red hot to start 2019. NIO competitor BYD had a record January. Tesla is making a big push into China, and just started delivering Model 3 vehicles in China in February.
In other words, NIO isn’t slowing because the market is slowing. NIO is slowing because the competition is ramping. That’s a red flag for long-term growth. It broadly implies that as competition grows in the Chinese EV space, NIO’s share of the market will remain capped by its niche product offerings and narrow, high-end demand. As such, while the company has long-term staying power in a secular growth industry, it doesn’t have enormous upside through share gains in that industry.
NIO Stock Is Still Richly Valued
The Q4 earnings report showed that NIO will likely remain a niche player in the Chinese EV market. This is a reality that NIO stock was not priced for, hence the 30%-plus drop in the stock.
The stock still isn’t priced appropriately. NIO has a $7 billion market cap on roughly 11,300 vehicle deliveries in 2018. Thus, NIO is being valued by the market at roughly $620,000 per 2018 delivery. Meanwhile, Tesla has a market cap of $50 billion on 245,000 deliveries in 2018. Thus, Tesla is being valued by the market at roughly $200,000 per 2018 delivery.
As such, NIO stock cannot afford a demand slowdown wherein deliveries don’t grow at a robust rate. Right now, they aren’t growing at a robust rate. More than that, delivery volume is actually declining. So long as this remains true, NIO stock will remain weak.
The Bottom Line on NIO Stock
NIO stock has always been a high-risk, high-reward play on the Chinese EV market, where the risks were larger than the rewards. The Q4 earnings report emphasized that the risk profile is only growing while the reward profile is shrinking.
As such, it’s best to stay away from NIO stock for the foreseeable future.
As of this writing, Luke Lango was long TSLA.