NIO Stock Is Getting Cheaper but Execution Risks Cloud Outlook

NIO (NIO), once hailed as China’s answer to Tesla (TSLA), finds itself at a crossroads as investors grapple with concerns over delivery growth, execution risks, and liquidity. Personally, I’m also concerned about the longevity of its battery-swapping model as charging times improve across the industry. Despite recent efforts to expand its market reach, NIO’s trajectory has fallen short of expectations, particularly when compared to competitors like Li Auto (LI) and Tesla. This is why I’m bearish on NIO stock.

NIO’s Dismal Q3 Results and Market Position

Let’s start by looking at NIO’s third-quarter results for 2024, which, all things considered, were rather disappointing. The company reported revenue of $2.66 billion, slightly beating analysts’ estimates despite a 2% year-over-year decline.

Vehicle deliveries increased by 11.6% compared to Q3 2023, reaching 61,855 units. However, the average selling price (ASP) decreased to RMB 270,000 per unit, a 14% drop from the previous year. This was attributed to a weaker product mix and increased promotional activities.

While gross margins improved to 10.7%, with vehicle margins rising to 13.1%, NIO’s net loss remained considerable and concerning at RMB 5.1 billion ($732 million). This persistent unprofitability continues to be a significant concern for NIO investors, as reflected in the company’s negative operating margin over the last twelve months.

NIO is Underperforming in Delivery Growth and Competition

What’s more, NIO’s performance in recent years has been disappointing, especially compared to its Chinese rivals. For me, this is a big issue because a track record, both in terms of material output and earnings, is a very important gauge.

While the company has seen some improvement, with Q4 2024 guidance projecting deliveries between 72,000 to 75,000 units — approximately 44% to 50% from the same quarter of 2023 — the revenue forecast is once again below expectations. In fact, NIO’s Q4 revenue forecast of $2.80 billion to $2.90 billion was quite a bit below the $3.18 billion analysts were expecting.

Moreover, the introduction of the ONVO sub-brand was intended to boost volumes. However, the ramp-up has been slower than anticipated. The company is now targeting 10,000 units per month by December 2024 and 20,000 by March 2025 — that would be up from 4,300 vehicles in October.

In contrast, competitors like Li Auto have shown stronger delivery growth, leading to some questions about the desirability of NIO’s vehicles. Tesla has also cemented its position as a dominant force within the sector while BYD (BYDDF) has grown sales at a rapid pace.

NIO’s Battery Swapping Technology: A Double-Edged Sword

Compounding these concerns about growth and profitability is my concern about the long-term viability of battery-swapping technology. As charging speeds for electric vehicles continue to improve, I’m increasingly concerned that battery swapping may become obsolete. This technology, while innovative, requires significant infrastructure investment and may limit NIO’s flexibility in battery design and vehicle architecture.

The company’s commitment to expand its battery-swapping network through the “Xianxiantong” program aims to cover 1,200 counties across China by June 2025. However, the cost is vast. Although these battery-swapping stations can become revenue-generating assets, they could also become costly assets to maintain.

Concerns over NIO’s Financial Health and Valuation

I’m also concerned about NIO’s financial situation. Despite being free cash flow positive in Q3, the company’s working capital declined by approximately $370 million. With about $6 billion in cash and investments, NIO has a buffer, but ongoing losses and expansion plans may necessitate additional capital raises in the future.

My cash concerns are compounded by uncertainty about NIO’s strategic direction. While the company has its ONVO brand and plans to launch the Firefly sub-brand to capture mass-market share, I believe it would be better to focus on strengthening the NIO brand itself and managing costs effectively. Prioritizing the core brand could lead to better financial stability, a more coherent strategy moving forward, and reduce execution risk to some extent.

From a valuation perspective, NIO trades at 1.02x forward sales, representing a 9% premium to the consumer discretionary sector. However, this is a modest discount to some peers like Li at 1.12x. Nonetheless, Li Auto is already profit-making and sits on a strong net cash position. I’m not convinced that the discount is large enough to make NIO look attractive versus its peers.

Is NIO Stock a Buy, According to Analysts?

On TipRanks, NIO comes in as a Moderate Buy based on eight Buys, five Holds, and one Sell rating assigned by analysts in the past three months. The average NIO stock price target is $6.23, implying about 29% upside potential. 

The Bottom Line on NIO Stock

While NIO’s share price might be getting more attractive on a relative basis, a deeper dive reveals several concerns, including a history of underperformance, continued losses, and a valuation that could arguably be more discounted. Personally, I’m also concerned as to whether battery swapping is the future in light of developments in charging technology. As such, I’m bearish on NIO and instead have a preference for profit-making and cash-rich Li Auto.