As NIO (NYSE:NIO) stock sinks, bottom fishers might feel that there’s a bargain here. Be sure to check the data first, though, since NIO’s margins are shrinking, and that’s not the only financial sore spot. All in all, I am neutral on NIO stock.
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Nio is a China-based electric vehicle (EV) manufacturer that has made impressive progress since the onset of COVID-19 several years ago. It didn’t happen immediately, but NIO grew its vehicle deliveries, and the automaker now poses a serious threat in the global EV space.
Yet, investors need to time their entry points carefully. Sometimes, share-price dips are warranted, and in NIO’s case, confidence needs to be restored before financial traders should consider taking a position, in my opinion.
A Good Month, but Not a Good Quarter
I can’t blame NIO CEO Bin Li for accentuating the positive and downplaying the negative. After all, that’s part of a chief executive’s job. Still, we must view any executive’s positive spin with skepticism, or at least put it in context and consider the bigger picture.
When NIO announced its second-quarter 2023 financial and operating results, Li made a statement that focused on July, which actually wasn’t part of the second quarter. He stated, “NIO delivered 23,520 vehicles in the second quarter of 2023. In July 2023, NIO delivered 20,462 vehicles, representing a substantial increase of 103.6% year-over-year.”
So, maybe the third quarter will be better than the second quarter since NIO ramped up its EV deliveries in July. What Li didn’t mention in that quote, however, is that NIO’s Q2-2023 vehicle deliveries were down 6.1% year-over-year and 24.2% quarter-over-quarter.
For the third quarter, NIO expects to deliver 55,000 to 57,000 vehicles, up 74% to 80.3% year-over-year. There’s no guarantee that this will actually happen, though. For now, only the past performance can be established, and NIO’s recent financial facts aren’t particularly encouraging.
NIO’s Declining Margins are a Major Concern
Most likely, NIO’s decline in quarterly vehicle deliveries isn’t the only reason NIO stock sold off today. There were other factors at work, including NIO’s declining margins.
Sure, Wall Street was disappointed to see that NIO’s second-quarter revenue fell 14.8% year-over-year to RMB8.77 billion ($1.21 billion). This result fell short of the consensus estimate of $1.26 billion.
Furthermore, investors certainly weren’t glad to find out that NIO posted a Q2 net loss of $0.45 per share. This result was worse than Wall Street’s already-pessimistic consensus forecast of a $0.41 loss per share.
Along with all of that, I suspect that financial traders were blindsided by NIO’s fast-declining profit margins. Here’s the lowdown: NIO’s vehicle margin shrank from 16.7% in the year-earlier quarter to just 6.2% in the second quarter of 2023. Moreover, the company’s gross margin plummeted from 13% in the year-ago quarter to just 1% in Q2 of 2023.
In the “CEO and CFO Comments” section of the press release, I would like to have seen an action plan for NIO to recover its margins. However, I only found positive spin and optimism, with no real road map to recovery.
Is NIO Stock a Buy, According to Analysts?
On TipRanks, NIO comes in as a Moderate Buy based on seven Buys and five Hold ratings assigned by analysts in the past three months. The average NIO stock price target is $12.95, implying 18.9% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell NIO stock, the most profitable analyst covering the stock (on a one-year timeframe) is Ming-Hsun Lee of Bank of America (NYSE:BAC) Securities, with an average return of 47%.
Conclusion: Should You Consider NIO Stock?
I won’t deny that NIO ramped up its vehicle deliveries in July, and the company might have a good third quarter. However, it’s still too early to form any conclusions about that.
Right now, NIO’s management might be optimistic, but this shouldn’t be enough to persuade skeptical investors. I foresee the potential for NIO stock to drop below $10 and stay there for a while.
NIO might redeem itself in the coming weeks with an action plan for profit-margin recovery, but that remains to be seen. Therefore, this isn’t a good time to consider investing in NIO, in my opinion, and I will be watching and waiting for further developments.
