As I recently discussed, China-based electric vehicle maker Nio (NYSE:NIO) this week announced plans to slash vehicle prices. This has helped to provide a boost for NIO stock.
Since the announcement, shares have made a nearly 20% move higher. As of this writing, Nio is back above $9 per share for the first time in nearly two months. Yet while it may be tempting to hop on the bandwagon, keep in mind that this rally could prove fleeting.
That’s not to say that NIO will soon reverse course, and make a fast move down to new lows. However, in the months ahead, negative sentiment about the stock could re-emerge. In turn, knocking shares back down to lower prices.
At least, based on two takeaways from Nio’s recent earnings report. While these takeaways have been overshadowed by the price cut news, they could soon become top of mind.
| NIO | Nio | $9.05 |
Trouble Ahead, Based on the Latest Numbers
It makes sense why investors have reacted positively to Nio’s price cut news. Up until now, the EV maker has been reluctant to participate in the Chinese EV industry price war. Tesla (NASDAQ:TSLA) initiated it last fall, and several local rivals followed suit. Nio, however, decided to stick to the sidelines.
But now deciding to compete on price, the market is more confident that Nio can live up to its ambitious growth goals for this year. As you may recall, Nio’s management a few months ago hinted that it could more than double its output in 2023 compared to 2022.
Still, per the latest earnings release for NIO stock, it’s very questionable that meeting, much less beating, this target, is within reach. During the preceding quarter (ending March 31, 2023), Nio’s vehicle deliveries totaled just 31,041. Outlook for this quarter calls for, at best, 25,000 vehicle deliveries.
To live up to its goal of 250,000 deliveries this year, each month from July through year’s end, Nio needs to deliver around triple the number of vehicles delivered last month. It’s reasonable to assume that moderate reduction in vehicle prices aren’t enough to triple demand for its vehicles.
Another Concerning Takeaway
Sure, Nio’s much-publicized 250,000 vehicle delivery goal was never a set-in-stone forecast. Not only that, per the earnings release, Nio CEO William Li and his team now merely state they are “well prepared for solid growth in vehicle deliveries.”
However, even if the company, through price cuts and increased output, manages to improve sales in the latter half of 2023 compared to the first half, don’t assume this will be enough to send NIO stock back to $15, $20, or even more per share.
At its current valuation ($14.85 billion), investors already are pricing in the prospect of Nio becoming not only a larger company sales-wise, but a profitable one as well. Yet while a further scaling up could in theory result in a move to profitability, don’t assume that is a given.
As also seen in the latest earnings release, Nio’s vehicle margins have compressed in recent quarters. During Q1 2022, the company reported vehicle margins of 18.1%. During Q1 2023, vehicle margins were just 5.1%, and came in at 6.8% for Q4 2022. Even if the company scales up in the coming quarters, the aforementioned price cuts could limit potential margin improvement.
The Verdict: Still at High Risk of Reversal
After digesting both Nio’s most recent earnings release, along with its latest vehicle price cut announcement, it’s clear that there’s a lot more that could cause NIO to reverse course later this year, rather than continue making a return to prior price levels.
With the bar set so high when it comes to vehicle delivery growth in the coming months, it appears very likely that the numbers will disappoint. The company seemingly needs to pull off the Herculean effort of tripling sales within one or two quarters just to wow investors.
Even if the market cuts Nio some slack, if it manages to report moderately high deliveries growth, squeezed margins could lead to heavier-than-expected losses. This too could also lead to a de-rating for the stock.
Still at high risk of a reversal, stay away from NIO stock.
NIO stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
