Headquartered in Shanghai, China, NIO Inc. (NIO) is a pioneer and a leading company in the premium smart electric vehicle market. The company provides five, six, and seven-seater electric SUVs and smart electric sedans. In addition, it manufactures e-powertrains, battery packs, and components and offers sales and after-sales management activities.

With the Fed’s persistent hawkish stance, rising bond yields, and increasing odds of an economic downturn, investors are fleeing riskier growth stocks such as NIO. The stock has plunged 71.1% year-to-date and 76.2% over the past year to close the last trading session at $9.69. It is currently trading 78.1% below its 52-week high of $44.27, which it hit on November 8, 2021.

Furthermore, NIO reported disappointing results for the second quarter that ended in June 2022. The company’s vehicle gross margins fell to 16.7%, compared to 29.3% in the prior-year period. Its adjusted net loss widened 575.1% year-over-year to RMB2.27 billion ($338.5 million) due to rising operating expenses and weaker gross margins.

However, the overall EV demand and favorable regulation remain a tailwind for EV players in China. NIO delivered 31,607 vehicles in the three months ended September 2022, up 29.3% year-over-year. Also, cumulative deliveries of NIO vehicles reached 249,504 as of September 30, 2022.

Here is what could shape NIO’s performance in the near term:

Bleak Financials

NIO’s total operating expenses increased 79.1% year-over-year to $624.93 million in the fiscal 2022 second quarter ended June 30, 2022. The company’s gross profit declined 14.8% year-over-year to $200.10 million. Its adjusted loss from operations worsened by 360.1% from the prior-year period to $351.60 million.

In addition, the company’s loss before income tax expenses stood at $411.96 million, widening 371.4% year-over-year. Its adjusted net loss came in at $338.50 million, widening 575.1% year-over-year, while its adjusted net loss per ordinary share worsened by 538.1% from the prior-year period to $0.20.

Unfavorable Analyst Estimates

Analysts expect NIO’s EPS for the fiscal 2022 third quarter (ended September 2022) to come in at $0.18. Furthermore, the company’s loss per share for the current and next year is expected to come in at $0.71 and $0.34, respectively.

Frothy Valuation

In terms of forward EV/Sales, NIO’s 1.64x is 52.2% higher than the 1.08x industry average. Its 1.99x forward Price/Sales is 141% higher than the 0.83x industry average. Likewise, the stock’s forward Price/Book of 4.11x is 66.4% higher than the 2.47x industry average.

Poor Profitability

NIO’s trailing-12-month gross profit margin of 16.24% is 55.3% lower than the industry average of 36.35%. Its trailing-12-month EBITDA margin of negative 16.44% compares to the industry average of 11.05%. In addition, its trailing-12-month net income margin of negative 24.08% compares to the 5.55% industry average.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of negative 32.83%, 9.50%, and 10.23% compare with the industry averages of 14.47%, 6.74%, and 5.09%, respectively. Moreover, its trailing-12-month asset turnover ratio of 0.50% is 50.9% lower than the industry average of 1.02%.

POWR Ratings Reflect Bleak Prospects

NIO has an overall D rating, translating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NIO has a D grade for Quality, in sync with its lower-than-industry profitability metrics. Also, it has a D grade for Stability. The stock’s beta of 1.46 justifies the Stability grade.

NIO is ranked #46 out of 64 stocks in the D-rated Auto & Vehicle Manufacturers industry. 

Beyond what I have stated above, we have also given NIO grades for Value, Sentiment, Growth, and Momentum. Get all NIO Ratings here.

Bottom Line

NIO reported poor results for the second quarter that ended in June 2022. Moreover, analysts expect the company to incur huge losses for at least the next two fiscal years. Despite strong EV demand and supportive government regulations, NIO is expected to suffer from material inflation, chip shortages, and other supply chain issues.

Given the uncertain macro conditions owing to surging inflation, the Fed’s tightening of monetary policy, and growing fears of a potential economic downturn, the stock is expected to decline further. So, we think it is best avoided now.

How Does NIO Inc. (NIO) Stack Up Against Its Peers?

While NIO has an overall POWR Rating of D, one might want to consider investing in other Auto & Vehicle Manufacturers stocks with an A (Strong Buy) rating, such as Stellantis N.V. (STLA), Honda Motor Co. Ltd. ADR (HMC), and Subaru Corporation (FUJHY).

NIO shares were trading at $9.63 per share on Monday morning, down $0.06 (-0.62%). Year-to-date, NIO has declined -69.60%, versus a -17.62% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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