When XPeng (NYSE:XPEV) set an autonomous driving record last week, it should have given NIO (NYSE:NIO) stock a strong lift.
Instead, Nio stock fell by 16.7%. Growing fears over the delisting of China-based stocks on the U.S. exchanges hurt the electric vehicle darling. Plus, the EV bubble’s pop is accelerating the drop in Nio’s share price again.
Nio, which traded as low as $2.22 in the last year and trades at above $35 today, rewarded its long-time investors. Those who bought the stock at the top will need to hope for a bounce.
NIO Stock Momentum Faded
The U.S. Securities and Exchange Commission’s adoption of a law called the Holding Foreign Companies Accountable Act is clouding the Chinese EV success story.
For example, competitor XPeng set a new record for autonomous driving on March 25. The company announced that the frequency of human driver intervention was 0.65 times per 100 kilometers. In the six days of driving, a person interacted less than one time per 100 kilometers in five out of six days.
XPeng’s success story is a positive catalyst for Nio. It will push Nio to advance its autonomous driving ambitions. Nio launched its first autonomous driving model, the ET7, in January. The model will start at $58,000 with the “Battery as a Service” subscription. Rather than charging their batteries, Nio owners trade them out as they fade.
Buy and hold investors may expect recurring revenue growth as BaaS increases. The more units sold, the bigger the recurring revenue.
Production Halt
On March 26, markets reacted negatively to Nio’s temporary production halt. Citing a semiconductor shortage, the company suspended production for this entire workweek.
This will lower its expected delivery to 19,500 units in the first quarter. Nio previously estimated a 20,000 to 20,500 vehicle production count. Assuming a loss of 1,000 ES6 SUVs at around USD 52,000 unsold, Nio loses $520 million in revenue.
Level-headed investors may look at the more than $5 billion in lost market capitalization as overdone. Conversely, the company could extend the production halt further. This would cut the revenue growth rate dramatically in the near-term.
Nio trades at almost 22 times sales (price-to-sales ratio), while General Motors (NYSE:GM) trades at 0.66 times. Markets will react negatively to any cut in future growth. The company could increase production in the next quarter. Given the semiconductor shortage, that option appears unlikely.
Inflection Point
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Tesla’s (NASDAQ:TSLA) steep drop from its $900 peak is bad news for Nio’s stock price. The more TSLA stock falls, the fewer reasons growth investors have in justifying the valuation in EV stocks.
In the table, GM has a deep value compared to the EV suppliers. That does not necessarily imply that GM stock is a buy. Nio needs to post positive EBITDA before the EV/EBITDA ratio has any meaning.
In the next few quarters, investors will need to continue waiting for Nio to sell more units to offset losses. Shareholders run the risk of the company selling shares to raise cash to fund operations.
Yet if the stock price falls, Nio dilutes its shareholders because if the company does not get as much cash per share, it will sell more shares.
On Wall Street, the average price target is $63.64, according to Tipranks. SimplyWall.st is dramatically more bearish. It foresees a fair value of below $10, based on Nio’s future cash flow. Nio needs to start producing positive free cash flow soon to overcome the downside view. That will not happen until its revenue greatly exceeds operating costs.
Your Takeaway
Nio is trading at levels not seen since the clean energy rally of November. The stock could fall further into oversold territory.
Should the stock reach maximum fear, investors will get rewarded if they initiate a small position at future lows. The continued listing of Nio on the U.S. exchange and renewed interest for EV stocks would send the stock higher.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
