NIO: 3 Catalysts For A Major Rebound

Summary

• NIO saw a drop-off in deliveries on a month over month basis in April.
• However, NIO's sedan delivery share continued to increase. New product launches could add to delivery growth.
• NIO continues to represent solid value due to an extraordinarily low P/S ratio. Break-even achievement could also be a catalyst.

Andy Feng

NIO (NYSE:NIO) saw a decent year over year increase in deliveries for the month of April, but the company's delivery monthly volume dropped again below 10 thousand units, which is a concern only in the short-term. On the positive side, the electric vehicle company achieved a 74% sedan delivery share last month and the company just started deliveries of the EC7 coupe SUV. With NIO's shares languishing, I don’t believe that the company’s delivery potential is properly reflected in NIO's valuation. I see three catalysts (2 short term, 1 longer term) that could drive a fundamental revaluation of NIO's delivery prospects!

Comparison of NIO's April delivery performance to its top EV rivals

NIO delivered 6,658 electric vehicles in April, showing a year over year growth rate of 31.2%. However, last year’s April results were suppressed due to supply chain issues so the delivery benchmark was low in the year-earlier period. NIO's deliveries fell below 10 thousand units again in April as the company adjusted its production lines and transitions to sedans and it was the first time since January that the company's deliveries fell below this psychologically important threshold.

By far the best delivery performance was achieved by Li Auto (LI) which delivered 25,681 electric vehicles in April, showing a massive 516.3% year over year increase. For reasons explained here, I continue to see Li Auto as top value for EV investors.

XPeng (XPEV) reported another month of declining year over year delivery growth. Of all three EV manufacturers, NIO had the lowest monthly delivery volume and Li Auto the highest. However, NIO's sedan production is ramping up and the company is launching new models soon which could bump up NIO's delivery growth rate again in the coming months.

Deliveries	Feb-23	Feb Y/Y Growth	Mar-23	Mar Y/Y Growth	Apr-23	Apr Y/Y Growth
NIO	12,157	98.3%	10,378	3.9%	6,658	31.2%
XPEV	6,010	-3.5%	7,002	-54.6%	7,079	-21.4%
LI	16,620	97.5%	20,823	88.7%	25,681	516.3%

Click to enlarge

(Source: Author)

Two catalysts: growing sedan delivery share, new EV product launches

One of the most significant business drivers for NIO in the last year has been the ramp of sedan products like the ET7 and ET5 which both launched last year. NIO has steadily ramped up production of its sedans at the expense of SUV production, however. As a result, NIO's sedan delivery share has increased again to 74% in April and I believe the sedan share could grow to 80% by the end of FY 2023. Electric vehicle sedans have become more popular in China in the last year which explains NIO's aggressive ramp. A ramp in sedan deliveries is tapping into this demand and could potentially reignite investor interest in NIO's shares going forward.

NIO ET7/ET5 Metrics	Dec-22	Jan-23	Feb-23	Mar-23	Apr-23
Total Deliveries	15,815	8,506	12,157	10,378	6,658
NIO Sedan Deliveries	8,973	6,316	7,120	7,175	4,945
M/M Growth	45.3%	-29.6%	12.7%	0.8%	-31.1%
Sedan Delivery Share	56.7%	74.3%	58.6%	69.1%	74.3%

Click to enlarge

(Source: Author)

The second catalyst for a potentially higher valuation relates to new product launches. NIO has started to deliver the EC7 in late April, a five-seater coupe sport utility vehicle which could drive delivery growth in the coming months. At the Shanghai auto show in April, NIO also debuted the new ES6 sport utility vehicle as well as the new ET7 flagship sedan. Deliveries for the new models are expected to begin in May 2023. NIO's new flagship ES8 sport utility vehicle is projected to see the beginning of deliveries to customers in June. New product launches could be a powerful catalyst for NIO's delivery growth, especially as the company's sedan line-up grows.

3rd catalyst for an upside revaluation

After years of fine tuning production lines and growing its product portfolio, NIO is finally coming close to break-even... which I believe would be an event of great significance for the EV company. NIO is expected to be profitable in FY 2026 (consensus view), but it could potentially achieve break-even earlier if sedan deliveries continue to ramp up and the monthly production/delivery volume returns to 10 thousand units. Strong demand for sedan EVs, new EV launches and scale could help NIO get there quickly.

NIO is expected to lose $0.31 per-share in FY 2024, so there is even a possibility, in my opinion, that the EV company comes very close to break-even as soon as next year. Investors would likely reward NIO with a higher valuation multiplier if they see the EV company finally posting profits.

Source: Seeking Alpha

NIO’s valuation

I can’t help but like NIO’s valuation at this point. NIO’s shares are currently trading at $8.15 which gives the electric vehicle start-up a low P/S ratio of 0.78X and a market cap of approximately $13.8B. NIO is expected to generate by far the largest revenues ($17.6B) of all three manufacturers next year. NIO achieved a significantly higher market cap during the pandemic and while the valuation at that time may have been inflated, I believe NIO has revaluation potential if the company executes on its sedan ramp.

Data by YCharts

Risks with NIO

The biggest commercial risk for NIO is a slowdown in delivery growth, a slowing ramp of sedan production, and declining vehicle margins. Of all these risk factors, I believe the first one, slowing top line and delivery growth, posts the biggest risk to NIO because it could potentially push the break-even year further out into the future.

Final thoughts

NIO saw 31.2% year or year delivery growth in April and Li Auto once again beat the EV competition regarding delivery performance. Due to strong demand for electric vehicle sedans, NIO continues to see a ramp in its sedan delivery share. New product launches, such as the new EC7 and ES6 could be a boost to NIO's delivery growth in the months ahead. NIO currently has the lowest P/S ratio in its industry group, and the EV company faces up to three important catalysts (2 short term, 1 long term): (1) NIO’s sedan delivery share continued to ramp up in April signaling a transformation to a less SUV-centric EV maker (2) NIO is launching new products which could add to delivery growth in the coming months and (3) NIO is rapidly approaching its break-even year. For those reasons, and because NIO's P/S ratio indicates relative undervaluation, I will remain long NIO!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NIO, LI, XPEV either through stock ownership, options, or other derivatives. 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.

Comments

[doubleE]

The new ES6 has to be a home run. If not, abandon all hope for this stock.

[doubleE]

How can NIO break even when it is about to launch two new brands ?
New brands imply new showrooms, new service centers and new development costs even if the underlying platforms are the same. Management guided to $140 million per quarter of cost related to new brands. They have no shot of breaking even in 2024 or 2025.

The ET5 has obviously failed as a volume driver. If the ES6 fails as well, NIO is done. The niche models like EC7 are irrelevant. Tesla took off with the success of Model 3 and Y.
NIO needs to replicate that with ET5 and ES6. Period.

This author produces fluffy, cheerleading articles with zero critical content.

[AnimeSnoopy]

Coming soon, the next article the asian investor, SVB: 3 Catalysts For A Major Rebound

[katmandu100]

Too risky at the moment in my opinion.

[bondsmoker]

China said its security services had raided the offices of Capvision, an international consultancy, in Shanghai, Beijing, Suzhou and Shenzhen. Chinese authorities have recently increased scrutiny of advisory firms, arresting employees of Mintz Group, an American due-diligence firm, and removing materials from Bain, an American consultancy. In April China updated its counter-espionage law, broadening its powers to examine documents and data on national-security grounds.

[bondsmoker]

Foreign investors (foreign to China) cannot buy shares in NIO, the company.

They can buy slips of paper that purport to be shares of NIO, the Chinese company - but they are not, in fact, shares of NIO, the Chinese company.

No further analysis is needed.

[cd7707]

This is a NIO promoter. From $60 to now had never sold NIO always claim good value with same reason 30% annual sales growth. Proof to be wrong every time. SA should ban this content provider.

[Hypergrowth Stocks Newsletter]

@cd7707 The lower a stock price goes, the more bullish you should be! I originally bought NIO at $2 and sold at $18 on its way up to $60. Everyone agrees that art $60 it was overvalued, just like a hundred other growth stocks in 2021/22. But today, growth stocks are at the lowest valuation based on a FWD 3 year P/S ratios I have ever seen on my 40+ years of investing. Don't be negative on a stock just because the price is down. If anything, you should want stocks to go down in price so that you can buy them cheaper. NIO is an easy tenbagger over the next decade.

[bondsmoker]

@Hypergrowth Stocks Newsletter

"Don't be negative on a stock just because the price is down."

Agreed. But one should be negative on a stock if it doesn't actually represent ownership in the company it purports to represent ownership in.

[Hypergrowth Stocks Newsletter]

@bondsmoker "One should be negative on a stock if it doesn't actually represent ownership in the company it purports to represent ownership in." I don't even know what that means.

[CatCameBack]

@The Asian Investor You need to show the math for number of cars sold, average price per car sold, gross margin per car, and operating expenses, in order to get them to breakeven. The math currently doesn't work out, and it is not even close. Please list those four numbers to make your case for breakeven.

[The Asian Investor]

@CatCameBack If you look at NIO's EPS trend (and the EPS trends of other EV companies like LI), break-even is very much in reach.

[CatCameBack]

@The Asian Investor Their EPS has been getting more negative. And here is there operating income for that last 7 years in millions of dollars:
-375,-761, -1395, -1591, -706, -708, -2267

[M Cuturic]

NIO seems like it could pop higher over the 2nd half of this year, however, EV affordability and a tepid Chinese economy worry me.

[mikemillman]

@M Cuturic
The affordability issue is coming down like all newer technologies. It is already more affordable when you factor in maintenance, operation and tax incentives. If external factors like emissions are factored in it isnt even close. The battery swap or batter as a service has massive advantages in my opinion

[The Asian Investor]

@M Cuturic As battery costs decrease, EV makers should be able to lower their prices drastically. This will affect margins negatively, but also help adoption, revenue growth and market share.

[Kenny Swiss]

@mikemillman battery swap is OK when EV needs hours on recharge, which is not the case anymore, the max I charge with my Y is 30mn, and it is 10mn more than needed, but because I'm new to EV I always charge more than I need.

The was TESLA goes with their battery as a platform makes much more sense to me than a recharge station.