Earnings Present a Significant Test for Nio Stock

NIO stock has ridden the EV wave in recent months; it needs to avoid falling off on Tuesday morning

This has been a good year for Chinese electric vehicle manufacturer Nio (NYSE:NIO). And that’s not just because of the soaring NIO stock price.

Image of Nio (NIO) logo branded on the exterior of a corporate building.
Source: Sundry Photography / Shutterstock.com

To be sure, the rally in NIO has been explosive. Shares have rallied 233% year-to-date and are up almost 600% from November levels.

But Nio also has taken steps to firm up its business. A $1 billion deal with Chinese investors calmed balance sheet worries, only months after the company reportedly had to delay payroll. Unit sales have steadily improved: deliveries in July more than quadrupled year-over-year.

The question, with a market capitalization now near $17 billion, is whether that good news is enough. Nio isn’t profitable, or close. Competition remains intense. The U.S.-China trade war has not been resolved and seems to be heating up again.

There is no shortage of skeptics out there; I’ve been one of them. NIO stock in recent months has made us skeptics foolish. With second-quarter earnings on Tuesday morning, it’s time for Nio itself to start doing the same.

What to Watch For

There’s really only one metric in Nio’s Q2 that is likely to move NIO stock. Surprisingly, it’s not revenue.

That’s not because revenue doesn’t matter. Of course it does. Rather, it’s because that information already is reasonably well-known. Nio has disclosed its deliveries for the quarter, and by model. Given that analysts know the average selling price for the ES6 sport-utility vehicle and the seven-seater ES8, Street consensus for revenue should be reasonably on point.

And it’s not even certain that loss per share will move the stock, assuming it’s within a few pennies of expectations. The absolute loss (and Nio will post a loss) matters less than how Nio gets there.

Rather, the critical metric looks to be vehicle margin (gross profit on vehicle sales). Not only has Nio been running at an operating loss, its gross margins on vehicles has been negative. That fact has underpinned the bear case toward the stock. It’s not only that vehicle margins are negative, but that they’re negative despite the fact that Nio itself doesn’t manufacture the vehicles.

Nio expects that margin will improve and in fact turn positive in Q2. Chief executive officer William Li said after Q1 that the metric would exceed 5% in Q2. With deliveries higher than the company expected and the soaring NIO stock price, investors no doubt are expecting upside to that target.

Vehicle margin alone can change the NIO story. An upside surprise to the high single-digits marks a substantial and quick improvement. It sets a path for Nio to get the figure into the double-digits. From there, investors can start modeling in a business that covers operating costs.

But weakness there undercuts a lot of the optimism generated in the past few months. It raises competitive worries. It means Nio is pricing its way to growth. And it brings long-term profitability into question.

Trading in NIO Stock

Beyond Nio’s numbers, trading in NIO stock itself will be interesting. The most obvious, and potentially worrisome, parallel, is Tesla (NASDAQ:TSLA).

TSLA, too, had roared into its second-quarter earnings report. It delivered a blowout report last month. Yet the stock promptly sold off and has stalled out in the two weeks since.

Indeed, there are some signs that EV optimism is starting to fade, or at least stabilize. Nikola (NASDAQ:NKLA) has pulled back by more than 50%. Spartan Energy Acquisition (NYSE:SPAQ) has weakened after soaring when it announced plans to merge with EV manufacturer Fisker.

Meanwhile, the Trump administration is ramping its pressure on Chinese stocks. The recent ban on WeChat sent Tencent (OTCMKTS:TCEHY) and other Chinese tech names tumbling. Nio may take a hit as well.

At the least, there no doubt are investors considering taking profits in NIO after the rally. Anything less than a spectacular earnings report may push them to do so. And as TSLA shows, even a blowout quarter sometimes isn’t enough.

Will Nio Deliver?

Short-term trading aside, this simply seems like a big quarter for Nio. A positive report cements the company’s stature as an EV leader in China, perhaps the preeminent market for the industry. Anything less and Nio looks like a potential niche player a market with nearly 500 manufacturers.

Obviously, those two stories suggest two very different valuations. The former sets up a potential, if still difficult, path to Tesla-like appreciation. The latter suggests a $17 billion market capitalization is far too high. Simply put, this is a big quarter for Nio.

Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/earnings-present-significant-test-nio-stock/.

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