Nio Inc (NYSE:NIO) is a Chinese EV company focused on the premium segment. Its stock has fallen almost 90% from its all-time highs in 2021 and is still over 37% below its IPO price. 

Year-to-date, the stock has fallen over 25%. At its current price, it looks like it’s trading at a discount. But here are three reasons to stay away from the stock 

Losing Market Share 

Despite sales growing over 30% YoY in 2023, we need to consider the fact that the overall Chinese EV market expanded by 38%. Its market share is now 2.1% and sells a fraction of the cars compared to established competitors such as Tesla and BYD. 

One reason Nio fell behind is that it refused to lower prices. With other premium leaders such as Tesla lowering costs, Nio remains stubborn and, as a result, is failing to meet all sales targets. In Q3, it missed revenue estimates by $50 million and missed the 250,000 vehicles target for 2023 by 36%.

Most dangerously, Nio operates in the premium segment in China when the economy is stagnating. Previously, the economic slowdown did not seriously affect China’s high-end consumers. However, that’s changing as housing prices continue to fall in China, where most people have a significant amount of their wealth in houses. 

As a result, market data and sales for luxury items are declining. While other premium brands such as Tesla and Li Auto continue to lower their prices, Nio is becoming increasingly uncompetitive in a very cutthroat market. 

NIO Stock is Overvalued

Most importantly, Nio is still overvalued. It trades at a P/S ratio of 1.45x compared to BYD, China’s market leader, which trades at a mere 0.87x. 

This is because Nio sold only around 160,000 vehicles and lost about $35,000 a car. Meanwhile, BYD sold 3 million vehicles and made $1,730 in profit per vehicle. 

With Nio’s growth falling behind its financials and sales remaining much worse than its peers, there is no reason that it can justify its current valuation. 

Shareholders Equity at Risk

As the market became more competitive, Nio’s margins started to decline. In Q3 2023, it was only 11%, compared with the 20%+ margins it saw in 2021. 

The company burns roughly half a billion of cash every quarter and has relied on shareholders to bail them out. It initiated a secondary offering in 2022 which increased shares outstanding by 33%. Recently, it relied on an Abu Dhabi fund that diluted shares by another 300,000 at $7.5 which was below market value. 

As Nio injects more capital from other shareholders just to survive, existing stockholders will see the value of their holdings decrease. With its financials still bleak, investing now seems like a sure way to lose money.

Conclusion 

NIO stock is no longer the Chinese EV darling it once was. Too many promises were made, and too many promises went unfulfilled. The company is now getting attacked from all fronts, from tough competition to the slow Chinese economy.

For shareholders, the company’s relatively high valuation versus its competitors makes it a risky bet. Most importantly, its financials continue to deteriorate and shares will likely continue to be diluted to keep the company afloat.

Investing in Nio stock is extremely risky and not worth the risk since there are many more EV companies with good fundamentals and valuation.

On the date of publication, Michael Que 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.

The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities