Do NIO's Losses Indicate a Rough Road Ahead For Chinese EVs?

NIO Inc. (NIO), a Chinese EV maker that grabbed investor attention during pandemic days, reported mixed earnings for Q1 yesterday, sending its stock 7% lower. With this, NIO stock has now lost more than 45% of its market value this year. The company reported revenue of $1.37 billion for Q1, a YoY decline of 7% which was $70 million below analyst projections as well.

NIO, despite the promising outlook for the EV sector, has been struggling of late due to several reasons. The company is burning cash at a rapid pace, highlighting the potential risk of ownership dilution for shareholders if the company taps into equity markets to raise funds. The company’s cash balance dropped 29% compared to Q4 2023 to $3.4 billion in Q1. NIO’s aggressive expansion plans include spending $3 billion to build new factories in 2024 and 2025, which calls for a capital raise.

NIO is facing pricing challenges as well, which would make it difficult to expand profit margins. The company guided for slower revenue growth than unit sales, which is a clear indication of competitive threats that have forced NIO to slash the prices of its vehicles.

Chinese Autos Facing Rough Headwinds

With the Chinese government’s generous EV subsidies being phased out, EV sales growth is decelerating in China. New-energy car sales in China, which include EVs and plug-in hybrids, are expected to hit 11 million this year, growing 22% YoY. This will be a notable slowdown from the growth rates of 36% and 90% registered in 2023 and 2022, respectively. Intense competition in the domestic market has forced EV makers to slash prices aggressively as well, impacting their profit margins. Amid China’s broad economic growth slowdown, the EV sector is also poised to face headwinds in the foreseeable future.

That said, Chinese EV makers continue to lead the way in electrifying the global vehicle fleet, and long-term trends are encouraging. In Q4 2023, BYD Company Limited (BYDDF), China’s leading EV maker, surpassed Tesla, Inc. (TSLA) to become the best-selling EV brand in the world. The cost advantages enjoyed by Chinese automakers will make it easy for them to grab market share in key global markets.

Can NIO Rebound?

NIO initiated its Q2 outlook yesterday, projecting vehicle deliveries between 54,000 and 56,000 for the second quarter, pointing to stellar YoY growth of around 130%. Citi analyst Jeff Chung, after digesting Q1 earnings, reiterated his buy rating for NIO and maintained his price target of $10.40, implying an upside potential of more than 110%. Deutsche Bank analyst Edison Yu also wrote in a research note that NIO’s better-than-expected Q2 deliveries guidance is an encouraging sign of a hopeful turnaround in prospects. CFRA Research analyst Aaron Ho, however, was not impressed by the Q2 guidance as he believes the demand for newly launched vehicles is tapering. The analyst maintained his $5.50 price target for NIO, implying the stock is marginally undervalued. Based on the ratings of 13 Wall Street analysts, the average NIO price target is $6.40, which implies an upside of 30% from the current market price.

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