Despite a seemingly decent start to the year for Nio (NIO) and other Chinese stocks, driven by all the buzz around Trump’s tariff deals and the idea that investors might ditch the U.S. market for emerging countries, Nio’s stock took a sharp dive after reporting its Q1 earnings a couple of weeks back. As a result, the ADR is down over 14% in the first three months of the year.
Right now, I’m skeptical about Nio due to its ongoing struggles to hit profitability targets, especially with management’s bold goals to double deliveries by 2025 and reach breakeven in about two years. Despite the firm’s resolute performance, I’m tentatively neutral on NIO.
In my view, investors should steer clear of this Chinese EV maker until we see solid improvements in profitability and cash flow, without Nio having to rely on extending accounts payable or issuing additional equity to sustain its operations.
Nio’s Strong Deliveries Mask Ongoing Struggles
Although Nio recently updated investors with a solid 42,094 deliveries in Q1—representing a significant annual increase of 40%, it’s still hard to shake concerns about the company’s bottom line. Nio continues to struggle to provide a clear path toward profitability in the near future despite its bold target of breaking even by 2026 and potentially turning profitable by 2027. In the most recent quarter, the company reported a net loss of $977 million, a 24% annual increase, pushing Nio’s 2024 losses to $3.1 billion—4% more than what was reported in 2023.
On the bright side, management has reiterated its goal of doubling deliveries in 2025 compared to 2024’s 222,000 units. A big chunk of this will be driven by expanding into other sub-brand segments like ONVO and Firefly, which should help the company scale more quickly.
What works in Nio’s favor is its positioning in an ideal market for electric vehicles: China. Unlike other comparable markets, China is adopting EVs at a solid pace. Additionally, Nio has a competitive edge with its battery swap technology, allowing users to quickly exchange their battery instead of waiting to recharge. The company has also modernized its fee structure with notions of “Battery-as-a-Service,” enabling customers to rent their batteries instead of owning them.
Additional Red Flags for NIO Stock
Another point worth mentioning, which has contributed to NIO’s recent stock underperformance, is the company’s announcement of a capital raise through the issuance of approximately 118.8 million shares, diluting 5% of its existing shareholders.
Nio plans to complete this placement around the second week of April, aiming to raise HK$4.03 billion (around $520 million). In my view, this highlights the risk of a growth-focused company burning through cash too quickly. The proceeds from this equity offering will be used to boost Nio’s research and development in EV technologies and new products while also strengthening the company’s balance sheet, which currently holds around $4.58 billion in cash and short-term investments.
This dilution announcement is disappointing, as Nio’s management had previously stated in Q3 that there was enough capital on hand, implying that they wouldn’t need to resort to share issuance anytime soon.
Is Nio Worth Buying at Current Valuations?
Nio’s stock performance has been highly volatile. With the stock trading lower after some recent bearish macro news, including Trump’s Liberation Day tariffs, the question now is whether this presents a buying opportunity due to the more attractive share price. It’s essential to recognize that Nio is a company still searching for profitability, with management targeting breakeven by 2026. In this case, running a 5-year reverse discounted cash flow (DCF) model makes sense for evaluating NIO’s current status.
Let’s start by assuming that, according to analysts’ projections, Nio is expected to grow its revenues at a compound annual growth rate (CAGR) of 11% over the next five years. Though the company hasn’t disclosed its tax rate, I estimate it to be around 15%, in line with its Chinese EV peer BYD (BYDDY).
In 2024, Nio reported negative operating margins of 33%. For this model, I’ll assume that operating margins will improve to -15% in 2025, breakeven in 2026, and finally reach a positive 2% in 2027. In 2028 and 2029, I’ll optimistically project that operating margins will hit the industry average of 8%.
I’ll also assume that over the next five years, depreciation and amortization (D&A) will remain at 80% of capital expenditures (capex), representing roughly 12% of revenues. For working capital, I’ll assume no significant changes—though I recognize this could be overly optimistic, given that Nio has been using a lot of its short-term assets (like accounts payable, i.e., taking longer to pay suppliers) to fund current liabilities in recent years.
Finally, I’ll estimate a 5% perpetual growth rate, in line with China’s GDP growth, and discount the cash flows at a conservative 13% rate, given the regulatory and macroeconomic risks associated with investing in a company based in and exposed to the Chinese economy.
Given these assumptions, I estimate Nio’s current equity value to be $4.45 billion. Dividing this by its approximately 2 billion outstanding shares gives a share price of $2.25, more than 40% lower than its current price.
It’s important to note that this is a speculative exercise, but it’s based on analysts’ growth projections, industry and peer averages, and Nio’s plans of reaching breakeven by 2026. While these assumptions could be off in either direction, this analysis highlights that, at least, Nio’s current valuation still carries a significant premium, even after the stock has dropped almost 15% in the past three months. Additionally, further dilution could have a substantial impact on the final price.
Is NIO a Buy, Sell, or Hold?
The consensus among Wall St. analysts is largely skeptical of NIO stock. Of the 12 analysts who have covered the stock in the past three months, only two rate it as a Buy, while eight have a Hold rating, and two rate it as a Sell. However, the average price target for NIO is $4.89 per share, suggesting a 30% upside potential from the current share price.
Profitability Remains Out of Reach
On the positive side, Nio has made solid progress with deliveries and is arguably in a great position: operating in the Chinese market (currently the biggest one for EVs), offering competitive differentiators like battery technology, and ready to ramp up deliveries with the expansion of its sub-brands, ONVO and Firefly.
On the flip side, the company is still burning through cash rapidly, and aside from optimistic promises and assumptions, there’s little concrete to support the current valuations. That said, I’m staying on the sidelines and sticking with a Hold stance on NIO.