Chinese EV maker NIO (NIO) is in a downward spiral. Here are some factors contributing to the prevailing bearish sentiment surrounding the company’s stock.
- NIO’s stock has experienced a significant decline of around 93% from its peak in January 2021.
- Factors contributing to the bearish sentiment include slowing revenues, rising costs outpacing sales growth, operational losses, and reliance on debt and equity issuance to offset losses.
- Despite challenges, NIO is making strides in fast-charging technology and maintains a strategic focus on luxury models. However, concerns remain regarding the company’s ability to control expenses and improve its bottom line.
NIO’s ES7 electric vehicle.
Reasons Behind NIO’s Fall
NIO shares have experienced a wild rollercoaster ride over the past five years. After reaching $61.95 per share in January 2021, NIO has tumbled approximately 93%, recently dipping below the $4 per share mark.
Some of the reasons behind NIO’s tumultuous journey are evident, especially considering its status as a growth-oriented electric vehicle company. However, its fundamentals have failed to ignite enthusiasm among investors.
Here are some key factors.
Slowing Revenues
NIO’s annual revenues have sharply decelerated since 2021. While revenues surged from $2.49 billion in 2020 to $5.68 billion in 2021 amid the EV market boom, subsequent years have seen sluggish growth.
Sales only increased by 25% from 2021 to 2022 and by a mere 9% from 2022 to 2023, indicating a clear slowdown in demand.
Source: Seeking Alpha
Rising Cost of Sales
An even greater concern for NIO is that its cost of goods sold (COGS) has outpaced revenue growth over the past three years. This surge is attributable to escalating material and labor costs, exacerbated by supply chain disruptions during the pandemic.
Additionally, selling, general, and administrative (SG&A) expenses have continued to escalate, raising doubts about NIO’s spending discipline amidst slowing sales.
Operational Losses
NIO’s operational losses have skyrocketed from $4.4 billion in 2021 to a staggering $22.6 billion in 2023, signaling a considerable gap from profitability in the short term.
While losses are expected for growth-focused companies like NIO, the lack of visible improvement in its bottom line raises long-term concerns.
Stock Dilution and Debt Reliance
To offset these losses, NIO has resorted to issuing approximately $4.8 billion in debt and raising nearly $5 billion through common stock offerings, resulting in significant share dilution.
Although the company boasts a relatively healthy cash position of $7.04 billion, continued cash burn, coupled with reliance on further stock dilution and debt, could spell trouble.
Source: Seeking Alpha
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The Bright Side
Despite facing challenges such as declining sales, shrinking margins, and escalating costs in a fiercely competitive global EV market, NIO has made significant strides in the development of fast-charging technology for electric vehicle batteries. The goal is to reduce charging times and extend driving ranges.
NIO is actively engaged in pushing the boundaries of battery technology and charging infrastructure to enhance the overall charging experience for its customers.
Furthermore, NIO’s strategic focus on luxury models, a niche segment within the EV market, has proven beneficial, offering potentially higher margins for the company. However, in the mass-market segment, where volume takes precedence over margins, NIO’s short-term strategy is geared towards prioritizing scale.
NIO is set to introduce its second mass-market brand (Onvo) in the second quarter of this year, with plans to launch its inaugural product in Q4 and commence mass distribution in the same quarter. Management anticipates sales of 200,000 units, representing a 25% growth in sales volume.
As a result, investors may need to adjust to the prospect of sustained lower gross margins in exchange for expanded market penetration and increased sales volume.
The Bottom Line
NIO shares still trade at significantly higher levels compared to about five years ago, despite hovering around $4 per share currently. Half a decade ago, NIO shares were priced at $1.50.
The market’s bearish sentiment towards NIO can be attributed to several discernible factors, including a deceleration in sales, declining gross margins, and escalating costs outpacing revenue growth.
The company’s increasing cash burn rate and reliance on potentially risky forms of financing, such as debt and equity issuance, add to investor apprehension.
I believe that achieving superior gross margins akin to those in 2021 will be challenging in the future, given the highly competitive global EV landscape.
While I don’t foresee NIO’s stock heading to zero, without tighter control over its expenses and some signs of improvement in its bottom line, NIO may find itself trending towards becoming a penny stock.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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