NIO Stock: Not A High Conviction Buy But Worth A Look (NYSE:NIO)

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NIO (NYSE:NIO) is a market-perform investment due to political risks and rising competition in a crowded market. As much as I love the company, it’s hard to truly love the stock. I love the company though! It’s one of my favorite companies on the market. I love the design of their ET7 sedan. It’s my favorite EV car on the market and if I could buy one, I would. Full stop.

Disappointing Earnings

However, love for a company and love for a product does not necessarily constitute a good investment. This week we saw shares rally from the year lows of $13.01. This is a far cry from all-time highs of $61.95 back on January 22, 2021. As of the writing of this article, NIO is trading at $21.55 after a disappointing earnings report. The stock has been showing some strength along with all of the Chinese stocks after some semblance of support from the Chinese government and following what seems to be a successful call between President Biden and President Xi on March 18, but risks do remain.

NIO’s earnings report came in disappointing on March 24, and although not a huge miss it was disappointing, nonetheless. Q1 2022 projected deliveries were at 25,000 – 26,000 whereas Wall Street was looking for 28,000 for the quarter. So basically disappointing in deliveries by about 1000 cars a month short. The chip shortage continues to weigh on the company.

NIO entered the Norway market back in September 2021 and investors were hoping for a more optimistic future. One big question is how will the war in Ukraine affect consumer sentiment in the region. What was once an aggressive and bold move by the company could turn out to be a disaster if this war drags on and the European economies go into recession.

Sentiment in China

Regarding the Chinese domestic market, few people who write or talk about NIO actually have ever been to China or speak Chinese. I mention this time and time again but it is an extremely important factor when talking about NIO. Whenever I ask my friends in China about NIO, most of them are not very familiar with the brand and, in fact, would rather buy a Tesla (TSLA). There is still a stigma among Chinese consumers that domestic brands do not live up to the quality of foreign brands. Popular brands such as Apple (AAPL) or Tesla have a massive following in the country and are a symbol of status. And Tesla’s further expansion in both China and Europe will continue to add to the pressure on NIO.

Lack of being a status symbol or must-have product has and will continue to be a problem for NIO. The company wants to compete in the luxury space but has to get over the stigma of being a local brand. Most of the Chinese local brands such as Li Auto (LI) or XPeng (XPEV) are targeting a more downmarket, which NIO is not. However, NIO does have the full support of the Chinese government, as is evident with its partnership with the oil giant Sinopec and the development of NIO Park in Hefei.

Because of its target market, the growth for NIO in China might not be as big as people think or assume it will be. And with the slowing GDP growth in China projected at 5.5% this year, which is a definite slowdown from a growth in 2021 of 8.8%, there are concerns that the Chinese consumer won’t be there to buy up these beautiful new ET7 sedans.

Valuation

NIO doesn’t have any P/E since it has no earnings, so we are forced to look at price to sales. At a P/S of 7, one could see NIO’s current valuation as cheap or expensive depending on how you want to look at it. When compared Tesla’s P/S of 20.73 it seems like it’s a bargain, but one must be reminded that currently, Ford (F) trades at a P/S of 0.49 and Toyota (TM) trades at P/S of 1.13. If one could enter into the NIO stock at a P/S of 6 or under, it would make it a much more attractive valuation, albeit still an unprofitable company.

EPS came in at -$0.16 a share. Profitability is likely off the table given the current chip shortage, while margin contraction to 17.2% from the previous 20.3% is certainly another disappointment. There have been rumors of an expansion into the USA, but this will be expensive and well off into the future. NIO has recently been posting job openings for a new office in Silicon Valley which could signal that the company is serious about expansion. However, the US market is incredibly crowded as it is, and it would take a lot of capital to develop battery-swapping capability stateside or a complete redesign and rethinking of batteries and charging systems for NIO.

NIO currently has debt at about $4.8m and about $1.4m of cash on hand. Plus it has the full support of the Chinese government which bailed them out back in 2019.

Competition and Risks

BYD (OTCPK:BYDDF) and Tesla have been eating up market share in China, while NIO is only ranking 8th in EV sales. Considering that both BYD and Tesla sell roughly 5 times the cars that NIO sells, it makes it hard to argue that NIO is the leader when it is clearly not. Plus XPeng and Volkswagen (OTCPK:VWAGY) offer competition in this space and sell about the same volume of cars as NIO.

Going forward, improving margins will also be difficult not only for NIO, but for all EV companies as the cost of lithium and nickel has been rising in cost. This, and the continuing chip shortage, will hurt production. It’s true that these challenges may only be temporary, but for how long is anyone’s guess.

NIO Stock: A Buy or Sell?

So is NIO a buy after earnings? As much as I like NIO, it’s hard to recommend buying above $20. Some Wall Street analysts at Mizuho and Deutsche have price targets around $50-$60; however, other analysts at Goldman, Morgan Stanley, and JPMorgan have targets closer to $30.

As stated earlier, I love NIO and I love the car; and I love the CEO too. However, disappointing earnings and political pressure make it hard to love the stock. I sincerely hope that NIO proves me wrong, but I think as the EV crazes die down and the winners will be sorted from the losers, we will see that ultimately the market share for NIO might not be as large as people think it will be. The extremely weak opening for NIO on the Hong Kong market is very troubling as well since one wants to see the excitement over new opportunities among Chinese buyers for domestic companies.

I rate NIO as a market perform, and under $20, is a dabble in which the P/S becomes more reasonable but not necessarily a conviction buy. Among all of the Chinese companies though, I think NIO is likely not going to face as much scrutiny from governments, be it the US or Chinese, since it’s a car company and much less sensitive to getting caught up in politics.