While 2023 left a sour taste in the mouths of NIO (NYSE:NIO) investors, with a year-end stock value decline of 7%, the company has kicked off 2024 with a glimmer of hope, particularly in its delivery numbers.
NIO reported a 31% surge in vehicle deliveries in 2023. Notably, December witnessed 18,012 deliveries, marking the third highest figure on record, trailing behind July and August statistics (see chart below). The question remains: can this ascendancy translate into an upswing in the stock market?
Pioneering in Battery Technology
NIO is fervently carving out a distinct niche in the EV domain through its emphasis on battery technology. Founder and CEO William Li recently tested the company’s long endurance battery pack by embarking on a 14-hour road trip across China, which was live-streamed for all to witness. The 1,000-kilometer range battery concluded the expedition with a mere 3% charge remaining.
Furthermore, NIO is actively developing its battery swap technology, a departure from the conventional battery charging modus operandi. The company’s ground-breaking approach allows for the swift interchange of a depleted battery for a fully charged one in under three minutes, presenting an efficient charging solution. With the current price of a battery pack exceeding USD 42,000, NIO recommends its subscription-based acquisition. This strategy holds the potential of offering a more visible revenue model for NIO, contingent on the widespread adoption of the technology.
NIO isn’t navigating this terrain solo. Late last year, it inked agreements with China’s Changan and Geely Holdings, both esteemed entities within the top 10 NEV companies in China (see chart above), a significantly higher ranking than NIO. Collaboratively, these alliances are focused on erecting a battery swap network and models.
Early indications suggest promising strides in this domain. The company’s battery swap business reportedly turned a profit in Shanghai, where these stations average 80 orders daily, surpassing the break-even threshold of 60 orders per station.
Yet, the road to profitability for NIO appears to be arduous. The company is currently grappling with significant losses. Its trailing twelve months [TTM] operating loss has steadily increased each quarter (see chart below), attributed to the swelling operating expenses.
In Q3 2023 alone, SG&A expenses surged by 33% year-on-year (YoY) and 26.3% sequentially, owing to the expansion of both personnel and sales and marketing activities in conjunction with new product launches.
Although NIO remains profitable on a gross basis, the gross margin has dwindled on a TTM basis over the past couple of years, a predicament not unique to EV manufacturers amid a fervently competitive market. Even Tesla (TSLA), the foremost EV behemoth by market capitalization, is contending with analogous challenges.
Encouragingly, there are signs of a turnaround. NIO witnessed a considerable spike in its gross margin to 8% in Q3 2023, representing a four-quarter high. This stellar performance transpired despite a 55.7% surge in the cost of sales, underscoring robust revenue growth of 46.6%.
Evaluating The Looming Outlook
While NIO’s revenue growth may be at its pinnacle, sustaining this trajectory seems implausible. The company forecasts a Q4 2023 revenue range of USD 2204-2289 million. If the actual figure aligns with the midpoint, full-year revenue growth will hover around 6.7%, registering its slowest ascent in five years.
Yet, with Q4 2023 deliveries exceeding the midpoint of the projected range by 4.3%, there’s a glimmer of hope for revenues to outpace expectations by 8%. Nevertheless, this still represents a marked deceleration from the 26.6% surge recorded the preceding year.
While analysts are optimistic regarding an upswing in revenues from 2024 through 2026, it doesn’t project profitability until 2027. However, it’s important to note that NIO isn’t the lone unprofitable entity in the current EV landscape. Of the top five EV stocks by market capitalization, only Tesla, BYD (OTCPK:BYDDF), and Li Auto (LI) have turned profitable thus far.
An interesting paradox emerges when we compare NIO with its non-profitable counterparts. Both Rivian (RIVN) and VinFast Auto (VFS) exhibit a more favorable revenue growth trajectory. Analyst projections position Rivian to expand by 22.5% in 2023, while VinFast’s growth is anticipated to soar by 44.7%.
Assessing Market Multiples
The stock’s TTM P/S warrants careful scrutiny within this context. Registering the lowest TTM price-to-sales (P/S) ratio of 2.1x among its peers, only lagging behind BYD (see table below), it assumes a similar position in the forward P/S for 2023, given that three-quarters of the numbers are already factored into it.
While ostensibly portraying NIO as an undervalued stock, the prevailing circumstances merit caution. Given NIO’s lack of profitability and the anticipated sluggish revenue growth relative to its peers in 2023, relying on the forward P/S for 2024 would be preferable; however, it’s prudent to await tangible progress in its numbers before drawing conclusions.
What Lies Ahead?
As one of the ten NEV companies in China, NIO presents compelling potential, particularly with its strides in battery-related innovations. The live demonstration of its long-endurance batteries, coupled with collaborations on battery swap technology, underscores its credibility.
However, the present moment finds NIO grappling with mounting operating losses, and despite healthy delivery figures, the anticipated deceleration in revenue growth diminishes its allure. While its seemingly attractive market multiples would under different circumstances invite attention, the prevailing slower growth trajectory relative to its peers detracts from its appeal.
Nonetheless, a silver lining emerges on the horizon for 2024. The Q3 2023 financials exhibited an improvement in gross margin, and analysts are optimistic about double-digit revenue growth for 2024. Yet, exercising caution, I’d prefer to observe further advancements before considering an investment. For now, a “Hold” rating on NIO seems prudent, though this assessment may be subject to revision if its performance accelerates sooner than anticipated.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.