NIO Inc. (NYSE:NIO) is a Chinese electric vehicle maker focused on the premium segment. NIO reported mixed fourth quarter 2021 results on March 24, 2022, after the market closed. NIO's Q4 2021 Non-GAAP EPS of -$0.16 missed by $0.02 but its revenue of $1.55 billion, up 52.0% year-on-year, surpassed consensus analyst estimates by $20 million. This revenue beat added to its fairly good show of revenue surprise historically. Since its listing, NIO has delivered 12 revenue beats out of 14 reported quarters.
For the first quarter of 2022, NIO executives have guided for deliveries of the vehicles to be between 25,000 and 26,000 vehicles, representing an increase of approximately 24.6% to 29.6% compared with the same quarter of 2021. The management guidance for the total revenue in the first quarter of 2022 is for it to come between RMB9,631 million (US$1,511 million) and RMB9,987 million (US$1,567 million), representing an increase of approximately 20.6% to 25.1% over the same quarter of 2021. This was lower than the then analysts' consensus estimates for the revenue at $1.65 billion (an increase of 33.8% Y/Y).
The outlook was provided together with the earnings release in March when the full extent of the fresh lockdowns from new waves of COVID-19 outbreaks was unknown. With only one week left in the first quarter, the lowered guidance for the quarter may be rather reliable. However, the second quarter performance could be much dicier and the management guidance should be watched closely.
The general expectation in late March was that the metropolis city of Shanghai, the most prominent but resourceful region under full-scale restrictions to bring the infection under control, would engineer a snap lockdown, conduct mass testing and quarantine, and reopen within a couple of weeks at most. Unfortunately, while Shanghai had previously been able to avoid the tough measures in the past two years even as the pandemic was raging elsewhere, the city appeared to be unprepared for the extensive lockdown. My local contacts shared that Shanghai was complacent and a sudden reversal into strict controls led to inexperienced volunteers helming leadership, while professionals like event organizers and delivery workers found themselves unable to help the community or their families.
The initial fumble led to unhappiness among the local residents who have been used to a higher standard of living than the other provinces of China and a potentially higher infection rate which extended the lockdown measures. Nevertheless, Shanghai is seeing the light at the end of the tunnel. On Sunday, Chen Tong, the Vice Mayor of Shanghai, said that shopping malls, department stores, and supermarkets will return to in-store operations with customers allowed to shop in "an orderly way." Agriculture markets and hair salons will also gradually resume on-site business with limited capacity.
Vehicular production may, however, take longer to resume normal output. Tesla Inc. (TSLA), which prides itself on having past successes in navigating supply chain challenges and labor constraints, nonetheless succumbed to the limitations imposed by the Shanghai government. Tesla's Shanghai plant produced a mere 1,512 in April, down from over 65,000 a month ago, according to data from the China Passenger Car Association [CPCA].
Although NIO's plant is located in Hefei, it is suffering from collateral damage as its supply chain partners in Shanghai, Jilin, Jiangsu, and several other locations were negatively impacted by the "dynamic COVID-zero" strategy in China. NIO delivered 5,074 vehicles in April, nearly half the 9,985 in March. We don't have details about NIO's resumption status as the company only revealed in early May that "the vehicle production has been recovering gradually" and it will "continue to work with its supply chain partners to accelerate the recovery of production to its full capacity." From this much, though, we can expect the output in the second quarter of 2022 to be severely curtailed over the first quarter.
Meanwhile, the CPCA announced that the passenger car sales in China plunged 35.7% to 1.04 million units in April, the biggest monthly drop since March 2020, the height of the country's initial COVID-19 outbreak, when sales plummeted 40% year-on-year. The sales of passenger cars in China continued to be weak in early May, declining 21% year-on-year to 254 thousand units from May 1 to May 8.
Hence, the current consensus estimate for NIO in the fiscal second quarter ending June 2022 calling for a 35.5% year-on-year growth in revenue to $1.77 billion looks to be rather unachievable. Recall that NIO delivered 21,896 vehicles in the second quarter of 2021. Assuming that NIO delivers the same number of vehicles in June as in March (i.e. 9,985), 80% of March output in May (i.e. 80% of 9,985 = 7,988), and adding that to the 5,074 in April, we have 23,047 vehicles for the second quarter of 2022. This is just 5% higher than the same period in 2021.
Sure, the vehicular output mix may be different, but it will take a significant shift to the more premium end of NIO's offerings and a larger increase in selling prices to achieve the consensus 35.5% year-on-year revenue growth for FQ2 2022. On April 10, NIO announced it would raise prices for its offerings as well as BaaS battery leases starting May 10 in response to the unabated spike in global raw material costs. The price increase was RMB10,000 across the board, a drop in the bucket considering that NIO cars can cost upwards of RMB300,000 per car. The NIO ET7 sedan will have a starting price of RMB458,000 for the regular version and RMB536,000 for the pioneer version after the RMB10,000 adjustment effective May 22.
With the FQ2 2022 revenue likely coming in lower than the consensus estimate, the actual EPS is likely to be even further from the consensus estimate. It is hard to imagine how NIO can deliver a smaller loss in the quarter ending June 2022 than the prior quarter with a smaller output and greater inflationary pressures.
I note that the consensus revenue estimates for the first half of 2022 has already fallen by 15-17% from three months ago. However, given that in mid-February, the analysts wouldn't have anticipated that China would enter into such an extended and intensive lockdown exercise across several large cities. Hence, the revenue forecasts appear to have further room for downward adjustments and likewise for the EPS estimates.
The share price of NIO has fallen from a peak of $62.84 in early 2021 to $14.31 currently. Despite a large drop, NIO stock remains multi-folds higher than the $1.32 trough it experienced in late 2019. The share prices of fellow Chinese EV makers, XPeng Inc. (XPEV) and Li Auto Inc. (LI), tended to move in tandem with NIO stock since their public listing in the third quarter of 2020.
Year-to-date, NIO stock is down 54.8%, similar to XPEV stock (54.7%), but faring much worse than Li Auto which has declined by 32.0%.
With the bloodletting amid continued revenue ramp up, the price-to-sales ratio of NIO has compressed from a high of 19.3 times to only 4.0 times presently. XPEV stock is trading at similar multiples (4.1 times) while Li Auto has a higher PS ratio at 5.8 times. In contrast, Tesla has a PS ratio in the teens.
Seeking Alpha's quant system has rated NIO stock as a "Sell" with a low score of 1.61. NIO scores a dismal F for its valuation factor grade, a D for profitability, a D- for momentum, and a C for revisions. Its saving grace is a respectable A- for growth, improving from the B- it received three months ago.
The price target for NIO Inc has fallen from $62 in September 2021 to $38.85 currently. This is $0.04 lower than the price target for Li Auto, even though the latter was last traded at $21.82 while NIO closed at $14.31. XPeng Inc has a price target of $47.65 while it last traded at $22.82.
This means that NIO has the largest price target upside among the three Chinese EV makers at 171.5%, higher than XPEV's 108.8% and Li Auto's 78.3%. Analysts can revise their price targets on NIO further downwards, but they have already taken a huge cut since the beginning of the year. Thus, it remains to be seen if the analysts are taking a wait-and-see stance or if they are indeed bullish on a rebound in NIO stock. At this moment, with a consensus "Buy" call on NIO and a huge price target upside, it suggests that Wall Street does not believe NIO stock is overvalued.
Shareholders of NIO Inc may have felt they were on an excruciating ride since early 2021, as the stock lost 77% from the peak. However, if it is any consolation, shareholders of other EV makers like Rivian Automotive Inc (RIVN), Nikola Corp (NKLA), Lordstown Motors Corp (RIDE), and Workhorse Group (WKHS) have fared worse with the share prices of these companies down 84.5% to 93.2% from their respective peaks. Shareholders of Tesla are in better shape but those who bought at the top are down 37.4%.
Unlike in 2019 when it teetered on bankruptcy, NIO now has the financial heft to last through the lockdown constraints and supply chain disruptions. It has a net cash position (denoted by a negative net financial debt) of $5.5 billion, nearly as much as XPeng ($6.0 billion).
As we look further out on the horizon, analysts are forecasting NIO to achieve a revenue estimate of nearly $30 billion by 2025, giving it a forward PS ratio of less than 1.0 (0.79 times). The corresponding EPS estimate for that year is $0.80, giving NIO a forward PE ratio of 17.8 times, a multiple befitting a value stock rather than a growth one.
We have witnessed how fast and drastic analysts can revise their forecasts downwards on tech stocks in recent weeks. Thus, it can be argued that the forecasts by analysts on NIO are similarly subject to wild adjustments. Nevertheless, note that NIO is the most well-covered stock among its EV peers whether in China or the U.S. with 26 Wall Street analysts and 14 SA authors. Rivian Automotive, the company backed by Amazon.com Inc. (AMZN) and sporting a comparable market capitalization as NIO, has only 16 Wall Street analysts covering the stock.
Fundamentally, NIO is already challenged as described above. Sentiment-wise, NIO is also affected by the delisting threat facing Chinese ADRs. On May 5, NIO and XPeng Motors joined the list of Chinese companies facing possible delisting. To mitigate the risk, NIO completed a secondary listing of its Class A ordinary shares on the Main Board of the Hong Kong Stock Exchange in March this year. It also recently announced a secondary listing on a third venue. Its Class A ordinary shares are slated to be listed and commence trading on the Main Board of the Singapore Exchange Securities Trading on 20 May 2022.
Meanwhile, Beijing is reportedly working to boost car consumption in rural areas with a new round of policies expected as soon as this month. Cui Dongshu, secretary-general of the CPCA, suggested that the Chinese government might consider implementing a tax credit for car purchases to entice consumers.
However, with the broader stock market in the doldrums, it would be foolish to think NIO shares can hold their own. No one rings a bell at the bottom and I suppose no one knows how close we are to the market nadir too. Even Warren Buffett, the world's most famous and respected investor, often said he had no clue about market timing. He reiterated this during the Berkshire Hathaway (BRK.A)(BRK.B) annual shareholders meeting on 30 April 2022, referring to his longtime business partner Charlie Munger, "We haven't ever timed anything. We've never figured out insights into the economy."
"We haven't the faintest idea what the stock market is gonna do when it opens on Monday - we never have," Berkshire Hathaway Chairman and CEO Warren Buffett (30 April 2022)
Furthermore, NIO's production may be thwarted if the U.S. raises national security concerns as an excuse to deny NIO of semiconductor chips. NIO currently has long-term and direct strategic cooperation with Nvidia (NVDA) and Qualcomm (QCOM) and regularly purchases from Texas Instruments (TXN) and German-based Infineon (OTCQX:IFNNY)(OTCQX:IFNNF). NIO's overseas ambitions may also be dashed if Europe deems its vehicles to be spyware, like the allegations leveled on Chinese telecom provider Huawei.
Given the treacherous trading environment and operational risks facing NIO, amid the steep devaluation in its stock, I rate NIO as a "Hold".
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.