Ever since Chinese electric-vehicle maker Nio (NYSE: NIO) reported weak fourth-quarter results, Nio stock price has drifted lower and has continued to trend towards its 52-week lows.
NIO showed off a new sedan at the Shanghai Auto Show on April 16, but that was too little, too late.
Nio stock appears likely to reach new lows in coming sessions. Is there anything that can get the stock to rally again?
A New Nio Sedan Is on the Way
NIO previewed its new, four-door sedan at the Shanghai Auto Show. The company already has two crossovers and will release a new one in 2020. NIO launched the ES8 last year in June and sold 15,337 of them. Next month, deliveries of the smaller ES6 crossovers will begin. Since the ES6 will cost $52,000, compared to $67,000 for the ES8, the newer vehicle should attract more buyers than its predecessor.
The ES6 could conceivably compete against Tesla’s (NASDAQ: TSLA) Model Y, since TSLA’s crossover is 10% bigger than its Model 3. But Nio has pricing and feature advantages over Tesla. The ES6 is more luxurious, has a higher range, and is faster than the Model Y.
In an effort to promote the ES6, NIO has launched 16 popup Nio Houses in 11 Chinese cities. Nio will limit the number of cities it enters, enabling it to reduce its marketing and operating costs. NIO does not yet have a vehicle that is of comparable size to the Model 3. But Tesla’s Model 3 is a bare-bones EV that does not have the same level of luxury as the ES6.
The very weak performance of Nio stock is a reaction to the company’s poor Q4 results and unimpressive Q1 and Q2 guidance.
Meanwhile, when the government did not announce its electric-car subsidy policy in January, markets waited. In March, there was still no news about the subsidies, creating uncertainties for consumers, many of whom won’t decide whether to purchase a Nio vehicle until the government announces its policy. Still, Nio has received 4,200 orders for the ES8, 1,300 of which are for the 6-seater version, which will not be available until Q2.
Nio has enough capacity to meet the potential increase in demand. Modifications to its production line will enable it to manufacture 100,000 ES6 and ES8 units annually. And, due to the company’s manufacturing partnership with JAK, its annual output could increase to 150,000.
Moving Past Disappointing Fourth-Quarter Results
Nio’s weak Q4 is fresh on the minds of investors, negating all of its supply increases and the potential government support ahead. Though its revenue surged 134% year-over-year to $500 million, its cost of sales came in at $498 million and its gross margin was just 0.4%. The good news is that its gross margin improved versus the previous year’s negative 7.9% level. As more ES8 models are shipped, its gross margin could increase.
Nio’s research and development costs rose by over 80% to $220 million, while its sales, general, and administrative costs surged 131% to $283 million. In Q4, its net loss totaled $501 million.
If Nio’s vehicle shipments slow, then its higher supply capabilities, new model introductions and technical specifications will not excite the owners of Nio stock. Instead, the company’s near-term quarterly losses could weigh on Nio stock price. For Nio stock to perform well, trade tensions between the U.S. and China must ease. That would raise consumer confidence in China and spur demand for luxury goods, including Nio’s vehicles.
The Valuation of Nio Stock
A ten-year discounted cash flow growth exit model enables investors to calculate the fair value of Nio stock based on its future cash flow. Only if Nio’s revenue rises by 50% annually will Nio stock price reach $10 per share again (per finbox.io). Meanwhile, the two major analysts covering Nio stock are bullish on the shares, as their average price target on Nio stock is $10.45, according to tipranks.
The Bottom Line on Nio Stock
Nio stock is by no means a conservative investment. It is a pure EV play that depends on strong consumer demand in China. Trade tensions, lower economic growth, and falling Chinese consumer confidence could cause demand for Nio’s products to continue to be weak. Conversely, a favorable trade deal between the U.S. and China, combined with a stimulative tax cut in China. would help Nio meet its sales targets.
As of this writing, the author did not hold a position in any of the aforementioned securities.