Nio Inc. (NIO)
Is Luxury EV Maker $NIO Ahead of It’s Time or Your Money?
Nio Inc. (NIO) is a LARGE CAP company founded in 2014 and began public trading (ADR) on the NYSE in 2018. In their own words from Nio’s website:
“NIO Inc. is a pioneer and a leading company in the premium smart electric vehicle market. Founded in November 2014, NIO’s mission is to shape a joyful lifestyle. NIO aims to build a community starting with smart electric vehicles to share joy and grow together with users. NIO designs, develops, jointly manufactures and sells premium smart electric vehicles, driving innovations in next-generation technologies in autonomous driving, digital technologies, electric powertrains and batteries.” [ https://ir.nio.com/governance/company-profile ]
A Quick Note on NIO:
Let's get a bit of housekeeping out of the way first. Since NIO is located in Shanghai its stock is a foreign equity. In order for foreign equities to be traded on U.S. stock exchanges, U.S. banks purchase shares and sell what are called American depositary receipts (ADR). ADRs are held by the U.S. banks that issue them. However, the shares they represent are actually held in the home country of the corporation. You may also see American Depository Share (ADS). An ADS is the actual underlying share that the ADR represents. How your brokerage handles foreign stocks may determine what acronym you see, but you’re still investing in a company, just in a more indirect way than you would with a US stock. As always foreign investing carries an added layer of complexity and risk.
Phil’s Take:
Electric vehicles (EVs) were a hot topic for the market in 2023. The Global X Autonomous & Electric Vehicles ETF (DRIV) gained 24.2% in 2023, beating the DOW (13.7%) handedly and nearly matching the S&P 500 (24.23%). While the big-name automakers battled Tesla for market share there are plenty of other companies taking advantage of increased consumer interest to roll out their own EVs. Nio is trying to do exactly that, building up a portfolio of “premium” smart electric vehicles while also investing in autonomous driving tech. They are also investing heavily in their battery swapping technology which they hope will provide a competitive alternative to charging stations.
Reading into the Chinese market is always a little tricky for anyone who doesn’t speak the language, but NIO’s most recent performance is encouraging. They delivered 18000 vehicles in December up 13.9% year-over-year. Their last three-month deliveries (up 25%) and 2023 totals (up 30.7%) are promising signs of growth. Their vehicle margin jumped to 11% in 2023 Q3 up from 6% the previous quarter and putting NIO closer to their goal of 15-16% in Q4. In December they entered into an agreement with Anhui Jianghuai Automobile Group to purchase portions of their manufacturing facility. Up to this point, Anhui had been jointly manufacturing all of NIO’s vehicles, meaning the acquisition of their manufacturing will allow NIO to move production inhouse and allow them to get a better control on costs and margins.
Their battery swap stations are also an intriguing opportunity for growth. Nio owns 2,239 battery swap stations in China (and another 30 in Europe) where NIO vehicles can drive up and swap out their battery for a charged one using a fully automated process. The company estimates that the stations need to average 60 swaps a day to turn a profit, with stations in the busy Shanghai area already averaging 80. NIO added Chongqing Changan Automobile and Geely Holding Group to their “battery swap alliance” with both parties signing strategic cooperation agreements in 2023.
In December NIO unveiled its first in-house developed autonomous driving chip, which will be used in the ET9 executive flagship sedan. Their newest announced model, the ET9 has an expected delivery date of Q1’2025. Another successful inhouse product would be another step towards improving margins. NIO is also moving forward with their Firefly and Alps sub brands. While the NIO brand remains focused on high end EVs, the Firefly and Alps brands are an effort to market more affordable models and to expand their products into Europe. Those products won’t make it to market until 2025 at the earliest but I’m encouraged by their efforts to expand. NIO already has battery swap stations in Europe and their current product line is available there as well.
In such a crowded and competitive market there are some reasons to be hesitant. In addition to competition from well-known global brands like Tesla, NIO has strong domestic competitors in Li Auto (LI) Xpeng (XPEV) and BYD (BYDDFF). Those companies also had good years and strong competition will have the potential to dent growth. They are spinning off their battery manufacturing division and announced a 10% reduction in employees as part of cost cutting measures. They are famous for losing eye watering amounts of money and any investors who bought into the NIO hype as “China’s Tesla” will be familiar with the $40-$60 share price NIO had as late as 2021. Investors were actually excited in December when NIO announced a Q3 net loss of $625 million, excited because it was 25% less than the previous quarter. The potentially anemic (by their standards) projections for the Chinese economy in 2024 is also concerning for a luxury car brand.
Clint’s Take:
I do love EV car companies. Tesla (TSLA) has created a market and continues to dominate worldwide when, not too long ago, we jokingly referred to EVs as "toys" and a concept that would never catch on. For better or for worse, Elon Musk has made his mark on history. Still, my attraction for the sector comes more from an optimism that we will eventually see a broadening in manufacturers and innovation. Even though US car makers have seemingly retreated some in EV production due to a lack of consumer willingness, it is still an exciting time and investment possibility. As for NIO, I see the innovation and moving EVs further, but not as much with a return on investment (ROI).
Dealing with a Chinese-based company is like playing the game of telephone, where every person on the line speaks a different language. While the US market has nuances and sentiments, translating the Chinese market on top of that can be rough. US-China relations have two separate tracks. One is geopolitical, a mix of human rights, defensive stances, and public perception. The other track is business. US businesses have much going on in China in manufacturing and export. When geopolitical issues flare up, US businesses with ties to China get scrutinized. The same idea is true for investors. Just as US companies with good metrics falter in the US markets because of sentiment, Chinese companies potentially can have the same lag effect two-fold (i.e., the business model and US/China relations). That isn't to say NIO is caught in that snare, but it is why I tend to shy away from Chinese-based companies in general.
More to NIO specifically, while the Chinese auto market was the largest worldwide in 2022 (26.8mm new units), and the momentum for EVs is better than here in the US, it seems like a natural path to growth. However, NIO continues to be outpaced by fellow Chinese EV maker Li Auto (LI) and, of course, TSLA. At the same time, we saw a surge in stock price recently ($9.43 high) after the company's "Nio Day" (12/23/23) and an uptick in orders after unveiling the ET9 model that price hasn't held ($7.56 yesterday's close). While there are reports that Chinese EVs could account for 62% to 80% of the worldwide market share by 2030 (according to RMI), NIO needs more legs to be part of that the way I see it today. NIO’s stock price movement makes the 52-Week low seems more likely than reaching a new high.
Moving Forward:
For us NIO is a “Prove It to Me" stock. Specifically, we want them to prove that they can continue to cut costs and push their vehicle margin closer to 15%. Their next earnings date is 02/29/24 (Happy Leap Day!) and if they can sustain their progress, we’ll be far more interested in a long-term hold. With no product launch scheduled for 2024 their growth is going to come from sales and vehicle margins. Abu Dhabi based CYVN Holdings just invested $2.2 billion in December after putting in $1 billion in July so there is still some institutional interest.
What’s New: 02/20/22
When we last looked at NIO they were on a downward trend as the company was looking to get on the right side of massive costs and a Chinese economy that just wasn’t spending money. A month later there appears to be signs of improvements. First the downward side appears to have stabilized, with the stock reaching a low in early February. The Chinese economy is also showing signs of improvement. Spending has increased recently but it is not yet clear if that is due to increased consumer optimism, or a temporary spike driven by their Lunar New Year festivities. All eyes now turn to their earnings date on 2/29. What I’m looking for remains unchanged. Margins and vehicle sales will drive the stock value in 2024. People are predicting a rough year for EVs this year so finding a floor is nice progress for the beleaguered stock, but they will need to show me more to warrant an upgrade.
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