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Why Nio Stock Will Stop Falling Soon

NIO stock is down on profit-taking for now, so as selling pressure eases, investors will focus on its strong fundamentals again

When Nio (NYSE:NIO) reported strong delivery numbers in its Aug. 11 earnings report, the stock started climbing again. Yet as fast as NIO stock bounced back, it fell afterward. Despite posting impressive delivery numbers and revenue growth, why will Nio trade not back to the $16.44 yearly high?

a sports car made by Nio
Source: Carrie Fereday / Shutterstock.com

Momentum investors expecting easy gains in the near-term forget that the shares of the Chinese EV maker are already up ten-fold from their 52-week low. Its market capitalization of $15.8 billion is half that of Ford Motor (NYSE:F). And although both firms are losing money on an earnings per share basis, Nio does not have a profitable business model.

Nio Stock Peaked

In its second quarter, Nio posted 10,331 vehicle deliveries, which includes 8,068 ES6s and 2,263 ES8s. This is up from 3,553 total deliveries from Q2/2019. At almost three times the deliveries, revenue grew 147.5% to $493.4 million. Nio reported a vehicle margin of positive 9.7%, compared with negative 24.1% last year.

Investors are likely disappointed that Nio lost $44.3 million. Though this is an improvement from last year, they will wonder at what unit delivery level will it become profitable.

Nio electric vehicles are not cheap. Consumers are price conscious now in light of the ongoing risks of China’s slowing economy. Escalating trade wars between China and the U.S. add uncertainties. The days of predictable, steady economic growth is no longer the case. This will harm consumer sentiment. Nio cannot assume that unit sales will continue growing as fast as it did in the second quarter.

Patience for Lower Entry Point

CEO William Bin Li said, “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.” He is optimistic that the business momentum from the second quarter will continue in the current third quarter. Gross margins reached a historic high while operating losses fell to the lost level ever.

Nio shares topped $14 ahead of the earnings report. The buying action beforehand may have led to a “sell on the news.” Patient investors who expect selling pressure to continue in the next few weeks may want to wait for a better entry point. The stock could potentially fall back to the high single digits.

If sentiment for China-based stocks weakens, Nio shares may under-perform further. For example, iQiyi (NASDAQ:IQ), said that the Securities and Exchange Commission requested certain financial and operating records as far back as Jan. 1, 2018. A few months before that, accounting fraud at Luckin Coffee decimated the stock. Luckin shares were no longer compliant with the Nasdaq listing and moved to the pink sheets.

Fair Value Reveals Downside

Wall Street’s average price target on Nio is $10.28 (per TipRanks). This implies downside of more than 20%. To win more bullish ratings, Nio needs to limit its operating spend and cut research and development costs without hurting product quality.

It also needs a favorable mix of higher ES8 sales compared to ES6. The car maker’s VP of Finance. Stanley Qu. said that the gross margin of ES8 is higher than that of ES6. But Nio continues to improve profitability for both models. As such, it did not break down the details on the margins of each EV.

Below, Nio beat analyst consensus estimates most of the time:

Nio earnings beat consensus estimates

Data courtesy of Stock Rover

Nio has plenty of advanced technologies in the EVs. For example, a voice navigation-guided pilot (NGP) is in testing. It is still not as competitive as the feature offered by Tesla (NASDAQ:TSLA). Investors should not expect NGP offered soon. Still, once it is available with HD Map, Nio owners will have a useful feature.

Tesla Split Effect

Investors who gambled early on Nio by buying the stock in the $2.00-$4.00 range need not add more shares nor sell to lock in profits. The investor hype in EV is not yet over. Tesla is splitting shares in a few weeks. Valuations for EV stocks may expand, lifting Nio stock with it.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, he owned shares of Ford.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/why-nio-stock-will-stop-falling-soon/.

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