Nio (NYSE:NIO) reported impressive second-quarter results on Aug. 11. Yet, Nio stock fell 9% on the news.
What gives?
On the top line, Nio had $493.4 million in sales in the second quarter, 139.4% higher than in the same quarter a year earlier, and 171.1% higher than in Q1 2020. On the bottom line, it lost $160.1 million on an adjusted basis from its operations during the quarter, 64.6% less than a year ago, and 31.8% lower than in the first quarter of 2020.
From a deliveries’ perspective, it delivered 8,068 ES6s and 2,263 ES8s. That’s 10,331 in total, almost three times last year’s deliveries in the second quarter. The same holds for the first quarter.
“We achieved a record-high quarterly deliveries of 10,331 ES8 and ES6 vehicles in total in the second quarter of 2020 and expect to deliver 11,000 to 11,500 vehicles in the third quarter as the momentum continues,” said chief executive officer, William Li, about Nio’s performance in the quarter.
“The current constraints on the productions will be lifted in the near future and we are confident that our production capacity can meet the accelerated demand of our models.”
Further, it expects Q3 2020 deliveries between 11,000 and 11,500, significantly higher than the 4,799 in Q3 2019 and 3,268 in Q3 2018.
So, again, what gives?
It Missed on Revenues and Losing Money
I used to be unsold on Nio. So much so, I even got a nasty email from a company employee asking me why I’d been so negative about the company. Fast forward to today, and I’ve been completely converted by the excellent job it’s done keeping the ball moving uphill despite facing financial issues that would stop many other companies in their tracks.
Nio stock dropped for three reasons post-earnings.
First, it missed the consensus sales estimate of $504 million by $10.6 million. I’m sorry, but in an environment where analysts are often flying blind on their calculations, an $11 million miss is hardly anything to write home about.
In my opinion, it’s a total overreaction by the markets.
Secondly, and probably the more significant concern is that Nio still lost $160 million during the quarter. Over the past four quarters, it’s lost $1.6 billion in operating income, a significant amount to be sure, but it’s clear that it’s going in the right direction.
Again, given it’s sorted its funding concerns through a deal with the Hefei municipal government, I don’t believe its current financial concerns are anywhere near what it faced at the end of 2019 and early 2020.
Sure, it still is exhibiting the same traits of Tesla (NASDAQ:TSLA) circa 2018, but we can see that business is improving, and with that, we know from Tesla’s experience the profits follow.
A year ago, I wouldn’t have said that. Today, I’m a lot more confident that it’s on the pathway to profitability.
The third reason is expectations have been ratcheted up in 2020. Nio management only guided for a 6.5% to 11.3% increase in third-quarter deliveries and an 8.8% to 13.3% increase in revenues. Investors want to see 20% sequential growth.
In this economic environment, it isn’t happening.
Is Nio Stock Too Darn Expensive?
My InvestorPlace colleague, Laura Hoy, believes it is.
“Here’s the thing about NIO stock — a lot of the optimism surrounding the EV maker is baked in. At this point, it seems the firm is playing catch-up to its bumper rally. NIO made its way from $3 per share to $16 per share in just a few weeks. Since then, the firm’s share price has been trading sideways waiting for another catalyst,” Hoy wrote on Aug. 12.
“It’s hard to say with certainty if, or when, that catalyst will come. Buying NIO now is speculative, especially at current levels, because NIO stock isn’t cheap.”
Trading at 12.7 times sales, Hoy’s got a point. For almost the same multiple, you can pick up Tesla, which has a battery program the entire world seems ready to gobble up.
So, yes, you do have to be careful about the price you pay for Nio in the near term. Long term, if you buy at $13, you ought to be okay.
A final point: Nio had a vehicle margin in the second quarter of 9.7%, as far as I know, the highest in its history. Now, in Tesla’s Q2 2018 earnings report, it had a Q2 automotive gross margin double Nio’s at 20.6%.
You can look at the margin situation with the glass half full (positive vehicle margin), or you can look at it with the glass half empty (nowhere near Tesla’s).
I choose the former. If you can get it in the low teens, that’s great. However, long-term, I don’t think Nio stock is too darn expensive. I believe it is growth at a reasonable price.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
