Nio Inc. (NIO, Financial), a Chinese electric vehicle maker known for its innovative battery-swap model, is experiencing a significant surge in its share price due to a series of positive announcements. This starkly contrasts the beginning of the year when the company faced multiple challenges, leading to a decline in the share price to multi-year lows.
Investor confidence has surged due to robust delivery figures in June, indicating a significant recovery following consecutive monthly declines. Moreover, the positive advancements of the company in the Middle East have further bolstered investor sentiment.
Nonetheless, I am concerned about Nio's valuation. The rapid increase in its share price does not have a corresponding improvement in underlying fundamentals. As a result, I believe the stock has become overvalued compared to most other opportunities in the EV sector.
Nio snaps losing streak
The recent turnaround in Nio's stock performance can be attributed to the company's latest delivery numbers. After a decline, Nio's shares rebounded strongly in June following a positive first-quarter earnings that surpassed expectations. Although the company experienced a sequential drop in deliveries and revenue, the numbers improved year over year. Furthermore, Nio witnessed a reduction in its net loss, and the company's management emphasized its commitment to bolstering sales of recently introduced vehicles while streamlining expenses.
The announcement of a significant improvement in June deliveries further boosted Nio's share price. Although experiencing a year over year decrease, the company delivered 10,707 vehicles in June, exhibiting a significant sequential growth of 74%. Nio plans to continue introducing new models and competitive pricing strategies to achieve its sales targets. However, the company expects increased gross margin pressure in the coming quarters due to price stabilization, higher sales levels and product mix.
An unexpected move by Nio following its earnings release further contributed to the rise in its share price. The company announced price cuts of 6% to 9% on all its EVs, joining the ongoing price war initiated by Tesla (TSLA, Financial).
Nio has recently changed its battery-swap service, previously provided free of charge. This service enables car owners to exchange drained batteries for fully charged ones multiple times within a month. The decision to introduce a fee for this service, coupled with the swift deployment of all its models on a cutting-edge second-generation platform, is anticipated to enhance sales for the company significantly.
Nio secures multi-million dollar backing from Abu Dhabi
Nio recently announced a significant investment of $738.5 million from the government of Abu Dhabi. This investment is crucial for Nio, following its weak first-quarter earnings and declining vehicle margins. The funding from Abu Dhabi will provide the necessary resources to address Nio's losses and potentially pave the way for establishing an EV production hub in Abu Dhabi. This move also indicates Nio's interest in entering the Middle Eastern market.
The investment bolsters Nio's cash reserves and supports the company's plans for new model launches and the expansion of its sedan line. Strategically, this deal positions Nio as a competitor to Lucid Group (LCID), which Saudi Arabia backs. Abu Dhabi's interest in EVs, coupled with the growing UAE market, presents a significant opportunity for Nio's expansion.
Risks
Nio's margins were hit in the first quarter due to pricing pressure, increased competition in China's domestic EV market and reduced consumer demand. The upcoming quarters will be crucial for Nio as it depends on its sedan portfolio's success and vehicle margins' improvement.
The competition in China's EV market is fierce, with global companies like Tesla entering the market and local players such as Nio, XPeng (XPEV, Financial) and Li Auto (LI, Financial) vying for market share. These companies have attracted investor attention due to government support, market expertise and advanced technologies. Nio, in particular, has benefited from a partnership with a state-owned entity.
However, it's important to note that Nio and most other EV manufacturers (with the exception of Tesla) are smaller players than industry giant BYD Co (BYDDF, Financial), which reported a record quarterly delivery of over 700,000 electric and hybrid vehicles recently. With global deliveries surpassing 466,000 in the second quarter, Tesla delivered around 155,000 vehicles in China alone. While Tesla and BYD are already highly profitable and expanding their market share in China, Nio still has a significant journey ahead to achieve profitability.
Shares are overvalued versus peers
While Nio's recent surge in share price and the positive June delivery data have generated optimism among investors, it is important to analyze the company's valuation metrics in the context of its peers and the industry. Nio's price-sales ratio ranked worse than 77.14% of companies in the industry, suggesting shares are substantially overvalued.
Nothing has fundamentally changed for Nio. Following a net loss exceeding $2 billion in 2022, Nio commenced 2023 with a comparable trajectory, incurring a net loss of nearly $700 million in the first quarter.
Takeaway
With substantial net losses reported in 2022 and the first quarter of 2023, Nio must address its financial challenges and find sustainable solutions before I would consider it.
Looking ahead, Nio must demonstrate its ability to control costs, increase revenue and achieve a sustainable business model. The company operates in a fiercely competitive market, facing domestic and international rivals vying for market share. Nio's success will hinge on its capacity to innovate, adapt to changing market dynamics and execute its strategies effectively.
Despite the challenges, Nio remains a prominent player in the EV industry, benefiting from growing consumer interest in sustainable transportation solutions. As the company continues to refine its operations, improve its financial performance and expand its product lineup, the coming quarters will be crucial in determining Nio's long-term viability and success.
