I rate the stock of NIO Inc. (NYSE:NIO) as a Hold.
The size (revenue base) and profitability of Chinese electric vehicle (EV) manufacturer NIO will increase in five years (gross margin expansion and becoming profitable at the net profit level). However, assuming that it is less effective in mass-market penetration than what investors would hope, slower-than-expected top line growth and a delay in the company’s route to profitability (net profit level) in the next years are the main downside risks. Following the stock price fall, Can NIO Stock Reach $1000 valuations have become more acceptable (single-digit EV-to-Revenue), although the company is still more costly than its Chinese EV counterparts. In lieu of a Buy or Sell investment rating for NIO, I have a Hold investment rating based on the aforementioned factors.
Key NIO Stock Metrics
Investors should pay close attention to three critical metrics for NIO: revenue, vehicle gross margin, and deliveries.
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NIO’s top line climbed by +49% YoY from RMB6,641 million in the fourth quarter of 2020 to RMB9,901 million in the most recent quarter, according to its Q4 2021 financial results press release. The company’s revenue for the fourth quarter of 2021 was substantially in line with market forecasts, surpassing sales projections by 1.5%.
On the other hand, Can NIO Stock Reach $1000 revenue in the fourth quarter of last year only marginally increased (+1%) on a QoQ basis. In contrast, the revenue for its rivals XPeng Inc. (XPEV) and Li Auto Inc. (LI) increased in local currency terms by +50% QoQ and +36% QoQ, respectively, in Q4 2021. The recent quarter saw considerably faster YoY sales growth rates for XPEV and LI, at +200% and +156%, respectively. Because NIO didn’t introduce any new models in 2018, its top line growth lagged behind those of its important Chinese EV competitors.
In terms of profitability, NIO reported that its vehicle gross margin increased by +280 basis points QoQ and +360 basis points YoY to 20.9% in Q4 2021 at its most recent quarterly earnings release. The firm highlighted the increase in “revenue per car” and cost savings brought about by adopting a different battery, notably the “75kWh LFP NCM hybrid battery,” for the recent quarter’s improved gross margin.
However, NIO has forecasted a considerably lower vehicle gross margin for the entire year 2022, in the 18%–20% range. NIO’s total FY 2021 vehicle gross margin, in contrast, was 20.1%. The company’s FY 2022 profitability is expected to be negatively impacted by increasing raw material costs, which is a major factor in the worse vehicle gross margin estimate for this year.
At the start of April, Can NIO Stock Reach $1000 made a separate announcement on the company’s Q1 2022 car deliveries. NIO reached a new historical high for deliveries in the first quarter of this year with 25,768 units, or a +29% YoY growth. However, on a QoQ basis, the company’s Q1 2022 car deliveries only saw a small +3% gain. The first model, the ET7, wasn’t even delivered until the end of March 2022, although NIO has plans to release three more models in 2022 (the ET7, ET5, and ES7). NIO’s first-quarter deliveries are still increasing gradually because the boost brought on by new model introductions has not yet been reflected in the Q1 2022 data.
NIO’s core indicators ultimately paint a contrasting picture of the company. This may help to explain why the stock’s share price has underperformed since the company announced its most recent quarterly results on March 24, 2022, after trading hours. The price of NIO stock has slightly decreased from $21.98 as of March 24, 2022 to $21.68 as of April 6, 2022, a decline of -1.4%.
Is NIO Predicted To Expand?
NIO is anticipated to continue growing in the near future in 2022, albeit more slowly than in 2021.
After the firm revealed Q1 2022 deliveries and Q4 2021 results, the sell-side analysts have been lowering NIO’s top line projections for 1H 2022, as seen in the figure below. The analysts anticipate that a portion of the company’s revenue will be carried over to the second half of the year, as evidenced by the rising consensus sales projections for the third and fourth quarters of 2022.
Consensus Quarterly Revenue Estimates For NIO Have Changed
Consensus Quarterly Revenue Estimates For NIO Seeking Alpha Have Changed
According to S&P Capital IQ data, the market expects NIO’s revenue growth to decline from +108% in fiscal 2020 and +122% in FY 2021 to +75% in FY 2022. The slower top line growth this year at NIO is due to a variety of issues. Supply chain problems and concerns with chip shortages are projected to have a severe influence on all of the participants in the global automobile sector, and NIO is no exception. In addition, according to management comments made on the most recent Q4 earnings call, deliveries of the company’s other two models, the ET5 and ES7, will only begin in September 2022 and Q3 2022, respectively, after the ET7 begins in late-March. As a result, it is only natural for deliveries and revenue to be weighted toward the second half of the year. This is why NIO’s projected full-year revenue growth for 2022 will be modest.
Separately, as noted in this March 31, 2022 Seeking Alpha News story, COVID-19 lockdowns in some areas of China might also pose negative risks to production and deliveries for Can NIO Stock Reach $1000 and its Chinese EV competitors.
Profitability-wise, I mentioned in the earlier section of this article that NIO’s vehicle gross margin guidance (declining from 20.1% in fiscal 2021 to 19.0% in fiscal 2022 as per mid-point of guidance) points to relatively weaker profitability for the company this year due to pressure from raw material cost increases. Also, according to financial information supplied from S&P Capital IQ, the sell-consensus side’s figures imply that NIO’s headline gross profit margin (as opposed to non-GAAP vehicle gross margin statistic) will similarly decline from 18.9% in FY 2021 to 18.0% in FY 2022.
The -32% decline in NIO’s shares year-to-date in 2022 is partially due to the company’s slower top line growth and reduced profitability estimates for the current year.
In five years, where will the NIO stock be?
The main mid-term trigger for the stock’s re-rating is the expectation that NIO would scale up to profitability within the next couple of years.
NIO stated that it anticipates “achieving breakeven or reaching profitability in 2024 for the whole year” during the company’s Q4 2021 conference call. This is consistent with S&P Capital IQ’s sell-side consensus predictions.
According to sell-side analysts, Can NIO Stock Reach $1000 will increase its revenue from RMB36 billion in fiscal 2021 to RMB187 billion in fiscal 2025 at a +51% CAGR. Because of economies of scale, NIO’s headline reported gross margin is anticipated to rise from 18.9% to 22.4% during the same time period. Financial projections for 2026 and after are not taken into account because only one analyst is contributing estimates. The sell-side anticipates that NIO will improve from a non-GAAP adjusted net loss per share of -RMB0.52 in FY 2023 to normalised earnings per share of RMB1.48 in FY 2024, before increasing by +906% to deliver an adjusted EPS of RMB14.93 in FY 2025.
However, there are dangers that could delay NIO’s path to financial success.
NIO has always concentrated on the luxury EV market in China. NIO must be successful in its efforts to penetrate the mass market segment if the firm is to grow its sales as quickly as the market anticipates. In order to gain market share in China’s mass market EV industry, NIO launched the ET5 model, noting on its Q4 2021 earnings call that “ET5 has attracted a bigger and more diversified user base.”
However, it is still too early to say if NIO will be able to successfully compete in the mass market sector. NIO recognised that its mass-market EV plan “has to be efficiency driven” at the company’s most recent fourth-quarter results announcement. In addition, NIO stated that in order to appeal to the mass market, it must “rethink the core design of our product,” which includes things like “materials” and “production processes.”
In other words, NIO may have slower sales growth and a longer period to achieve profitability if it performs poorly in the mass market EV area.
While the competition is still fierce, NIO’s efforts to focus on the mass market segment could also distract management from its primary premium category items. Tesla (TSLA), followed by luxury German brands like BMW (OTCPK:BMWYY), and Audi (OTC:AUDVF), were the “second most-favored” premium EV brands in China behind domestic names, according to a Bernstein study that was referenced in a CNBC item from November 2, 2021.
In conclusion, NIO will maintain its top line growth and raise its profitability over the following five years. However, the company’s share price performance over the medium term will be influenced by the rate of revenue growth and how quickly it achieves profitability.
Should I buy, sell, or hold NIO stock?
I recommend holding NIO stock.
Comparison of NIO’s Peer Evaluation
Stock Consensus Forward Two-Year Revenue Growth Consensus Forward One-Year Revenue Growth Consensus Forward Next Twelve Months’ Enterprise Value-To-Revenue Multiple Consensus Forward One-Year Revenue Growth Consensus Two-Year Headline Gross Profit Margin for the Gross Profit Margin 3.9 +74.6% +67.9% 18.0% 20.1% \sXPeng 3.1 +102.1% +63.1% 14.0% 17.5%
Li Auto 2.5 +68.1% +92.2%
S&P Capital IQ is the source.
Following the year-to-date -32% share price correction, NIO’s values are acceptable in absolute terms (low-single digit Enterprise Value-to-Revenue multiple). However, despite slower revenue growth (on a relative basis compared to peers) in Q4 2021, the company is valued higher than its competitors. Additionally, Li Auto’s consensus forward gross profit margins and NIO’s consensus one-year forward revenue growth rate are both superior to those of XPEV and LI.
I believe NIO deserves a Hold or Neutral rating in light of its current pricing and the haziness surrounding its five-year outlook (mass market success is essential).
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