Nio: Still Risky, But the Situation Has Definitely Improved

Nio (NYSE:NIO) is a Chinese electric vehicle (EV) maker. It’s had a wild ride over the past few years. Following the initial public offering (IPO, Nio’s CEO came out guns blazing, suggesting that Nio would be the Tesla (NASDAQ:TSLA) killer in China. However, a one-two punch of massive operating losses and the pandemic nearly pushed Nio into bankruptcy; the stock lost 90% of its value from IPO to early 2020.

A close-up shot of the Nio (NIO) ES8 vehicle.
Source: xiaorui / Shutterstock.com

Since then, Nio made one of the most incredible comebacks of recent market history. Despite the bleak macroeconomic conditions, Nio was able to raise funding and reinvigorate its business. NIO stock gained steam, rallying from $2 to $5 to $10 and then much higher. Shares ultimately hit $60, rewarding traders with gigantic gains.

Now, however, Nio shares have slipped 50% once again amid rising concerns about EV valuations in general along with the backlash against U.S.-listed Chinese shares. This is leading investors to wonder if Nio has another comeback in store, or if the firm’s luck has finally run out. While I’ve been in a skeptic of Nio in the past, I must give credit where it is due. This business has gotten a lot better in a hurry.

Rapid Growth With Improving Profitability

For Q4 of last year, Nio delivered more than 25,000 of its luxury vehicles. This is tremendous growth, up 44% year-over-year. As recently as early 2020, Nio was struggling to deliver any meaningful number of vehicles as it faced a liquidity squeeze and economic uncertainty. Now, however, the company has become one of the most important EV makers in the Chinese marketplace.

Thanks to Nio’s luxury market positioning, it can earn high profit margins on the vehicles that it sells. This has allowed it to rapidly improve its financial picture. In 2019, back when deliveries were minimal, Nio lost a stunning $1.6 billion in a single year. In 2020, Nio lost another $705 million. For 2021, however, the net loss will be far smaller. Analysts see Nio approaching breakeven in 2022 and even turning a profit in 2023.

Analysts had warned that Nio could end up running out of cash if its 2019 and 2020 levels of losses continued. Fortunately, Nio was able to raise capital to stave off any near-term liquidity squeeze during the height of the pandemic. And now, as sales ramp up, Nio should be able to reach a self-sustaining financial status based on its own vehicle sales.

Nio’s Valuation

As far as valuation goes, there’s two ways to look at Nio. You can compare it to traditional automakers, against which it is brutally expensive. Analysts expect Nio to turn to positive earnings in 2023, generating 19 cents per share of profit. That’s an accomplishment given Nio’s string of outsized losses in prior years. However, it still amounts to a P/E ratio in excess of 150.

Meanwhile, the traditional auto makers remain dirt cheap. Ford (NYSE:F) is going for 12 times forward earnings, General Motors (NYSE:GM) is at nine times earnings, and Toyota Motor (NYSE:TM) is around 11. Ironically, folks such as Cathie Wood are suggesting that there is a “bubble” in traditional automaker stocks since their shares have appreciated sharply in recent months. However, they’re still far cheaper than the disruptors like Nio or Tesla.

On the other hand, is Nio a bad deal compared to other EV makers like Tesla or Lucid (NASDAQ:LCID)? There, the math is much more favorable to the Nio bulls. Tesla also sells for a triple-digit P/E ratio. And it’s going for more than 20 times revenues, whereas Nio is at a healthier 9x multiple. Lucid, of course, is just starting to generate commercial revenues and thus isn’t even comparable to an already-established business like Nio.

NIO Stock Verdict

I’ve never been much of a fan of NIO stock. The combination of its unproven business model, high overhead costs, and China risk has scared me away. And there’s still no rush to buy shares today, as those risks largely remain in place.

That said, the price has come down an awful lot since Nio’s peak last year. Meanwhile, management has continued to execute with tremendous success on the business plan despite the obstacles in China and the semiconductor supply chain issues that have hampered the auto industry more generally.

There’s still a bunch of risk in buying NIO stock at today’s price. But, for the first time in awhile, the reward is starting to look attractive enough to possibly justify the risk.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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