Stocks to sell

NIO Stock Warning: Why This Battered EV Maker Has Nowhere to Go But Down

Nio (NYSE:NIO) stock has witnessed some wild moves since listing in September 2018. It was during the meme euphoria of 2021 that the stock touched highs of $62. There has been a sustained correction from those levels and Nio stock trades at $4.30 after a drop of 60% in the last 12 months.

I believe Nio stock will continue to destroy investor wealth in the coming years. With relatively better investment options among electric vehicle stocks, it’s best to steer clear of Nio. This column focuses on the factors to be negative on this EV maker.

While there is ample scope for EV penetration in China (new-energy vehicles are likely to make up to 50% of China’s new car sales by 2030), competition is intense and Nio has failed to deliver in terms of growth and margin expansion. As the stock declines and financial flexibility shrinks, it’s a matter of survival and Nio is struggling.

Unattractive Vehicle Margin and Significant Cash Burn

For the first quarter, Nio reported a vehicle margin, or profit margin, of 9.2%. On a year-on-year basis, vehicle margin declined by 270 basis points. If we look at Chinese peers, it’s clear that Nio is unattractive.

To put things into perspective, Li Auto (NASDAQ:LI) reported a vehicle margin of 19.8% for Q1. Similarly, Zeekr Intelligent Technology (NYSE:ZK) reported a vehicle margin of 14% for the quarter. With Nio’s peers reporting better margins, its understandable why there’s a strong bearish argument for Nio stock.

Additionally, Nio has been reporting significant cash burn that translated into weak fundamentals. For Q1, the EV maker reported a loss from operations of $747.1 million. This would imply an annualized operating loss of almost $3 billion. Nio will be rolling out its low-price Onvo and Firefly EV brands. The price war implies that the company’s cash burn will likely be sustained in 2025.

Nio had a strong cash buffer of $6.3 billion as of the first quarter. However, considering the losses, I believe the company will need to raise funds for survival. Therefore, from a fundamental perspective, Nio looks weak.

Macroeconomic Headwinds and Tariffs

The electric vehicle industry faced multiple headwinds in the last 12 to 18 months, including sluggish global growth, inflation, intense competition and geopolitical tensions. These headwinds have impacted some companies more than others.

For example, Li is exclusively focused on growth within China. On the other hand, Nio has aggressively expanded into European countries and intends to enter the U.S.

The challenge is that the European Commission has set provisional duties of up to 37.6% on EVs imported from China. The U.S. will also increase tariffs on Chinese EVs and batteries from August. This is likely to have an impact on delivery growth and margins.

In terms of positives, the world is moving towards expansionary monetary policies. Lower interest rates are likely to boost growth and consumption spending. However, competition and tariffs will continue to have an impact on margins and cash flows.

The Bottom Line: Stay Away From The Falling Knife

There is a temptation to consider exposure to a stock that has fallen by 60% in the last 12 months. However, it’s important to note that the meltdown is on the back of poor fundamentals.

The electric vehicle industry is at an interesting point where the winners will be separated from the laggards. While some EV stocks will surge higher in the next 24 months, others are likely to perish. With a weak balance sheet and significant cash burn, Nio will struggle to survive.

In March, Li Auto revised its growth outlook and the management opined that it put “excessive emphasis on sales volume and competition.” Further, the management emphasized its focus on creating value for users and driving operational efficiency. In my view, this is the right strategy than growth at all cost.

While Nio reported healthy delivery growth for Q2 2024, the stock has remained depressed. The reason is the prospects for continued cash burn and the potential need for equity dilution.

On the date of publication, Faisal Humayun did not hold (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.

On the date of publication, the responsible editor held a LONG position in LI.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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