Nio’s share price has accelerated 20% since the beginning of July. Fuelling this has been Q2 delivery numbers of its premium electric vehicles (EVs) that have exceeded management expectations.
While the stock is still down 50% since the start of the year, and over 50% since this time last year, the numbers have been enough for bullish traders to jump onto what for many is a risky stock.
But behind the recent rally lies efficiency problems and the question of whether Nio [NIO] can compete with the likes of Tesla, let alone traditional car manufacturers who will eventually enter the EV market.
As this month’s Q2 earnings come into view, there is a danger the wheels are about to come off Nio’s share price.
How Nio performed last quarter
In Q1, Nio saw losses of 36 cents per share and quarterly sales of $243.05 million. Gross margin was -13.4%, compared with a 0.4% increase in Q4 2018.
However, Nio has already revealed that it managed to shift 3,553 of its ES8 and ES6 vehicles in Q2. This figure was well above management guidance of 2,800 to 3,000. While this was enough for the stock to rally, the numbers look less impressive when compared to Q1's 3,989 deliveries.
What to watch
July's delivery numbers hit reverse
Q2's delivery numbers might have been good, but July's numbers marked the EV manufacturer’s third-worst month.
Nio delivered 837 vehicles last month: 673 ES6s and 164 ES8s. Nio blamed necessary improvements to manufacturing capacity and its decision to bring some deliveries forward into June to head off further EV subsidy reductions. Furthermore, the firm recalled 5,000 electric ES8 SUVs at the end of June due to battery concerns and, to resolve the issue, the company focused on battery manufacturing capacity over deliveries. The net effect was a hit on deliveries in July.
Number of ES8 SUVs recalled at the end of June
This highlights a negative valuation/efficiencies story that has seen Nio's financials shift lower.
Under the hood, Nio trades on an enterprise value/sales ratio of 4.4. Compare this to Tesla’s 2.1 and you get a sense of where the problems start. Unlike Tesla’s $4 billion in gross profits over the past 12 months, Nio’s ‘profit’ comes in at -$255 million over the same time period. Return on equity is an eye-watering -433%, suggesting shareholder money isn't going far. This makes Nio’s market cap of $3.29 billion look overvalued, especially considering it supports a forecasted -4.17 PEG ratio over the next 5 years.
Effects of US-China trade war
Another explanation for the recent surge in Nio's share price is traders trying to piggyback on the Chinese growth story. Nio is the only Chinese EV maker listed on a major exchange.
However, this leaves Nio exposed to the US-China trade war. From Friday's close, Nio’s share price had dropped a huge 10% by the end of the trading day on Monday as Chinese authorities let the yuan fall to a 10-year low against the dollar in retaliation for the US’s latest increase in tariffs.
Nio's share price decline from Friday 2nd to Monday 5th's close
Slowdown in China’s automobile market
The increase in tensions comes amid a slowdown in the Chinese automobile market. June marked the twelfth straight month that consumer demand for new cars dropped in the country.
In May, sales of electric vehicles grew by 1.8% year-on-year, according to data from China’s Association of Automobile Manufacturers. This is a far cry from the 126% growth seen in May 2018. This decline in sales is likely to weigh on Nio’s profits in the earnings update.
The case to sell Nio
Worryingly, the number of Nio shares being shorted grew month-on-month in July, suggesting that some traders think there is more opportunity betting against the stock than buying it.
Over on Zacks, the stock is rated a "Sell" and ranked number 233 out of 255 in the Zacks Industry Automotive - Foreign segment. And even with the recent surge in share price, shares are trading well off their 52 week high of $13.8.
|Total Debt/Equity (MRQ)||314.11|
Nio share price vitals, Yahoo finance, 12 August 2019
Tesla is also encroaching on Nio’s premium status in China. In the first half of the year, Tesla grew its revenue 42% in China and is on track to open a 'gigafactory' in Shanghai. Nio doesn't even have its own factory, having to rent space at state owned JAC Motors’ factory.
With Tesla expanding in China, the end of government subsidies for EV purchases and a slowdown in consumer spending, Nio is coming under pressure from multiple directions.
The case to buy Nio
It’s not all bad news for Nio. Despite the cut back in subsidies, the Chinese government is still promoting buying EVs in order to reduce the country’s high pollution levels. Nio also came out on top in J.D. Power’s inaugural China New Energy Vehicle Experience Index Study, beating both domestic and international competition. If the company can position its brand as the premium choice in the Chinese market, then it has a chance of seeing off Tesla.
Success will depend on the company cranking out cars people actually want. In this respect, things look promising. In June, Nio released its smaller E6 model which has so far generated 12,000 pre-orders.
Nio’s share price is hovering just above $3 - potentially a good entry point for traders that think there is upside in the stock. But it’s a risky long-term bet.