Nio’s stock stuck in a rut despite steadily improving performance

The new energy vehicle maker has recorded adjusted profits in the last three quarters, yet its stock now trades near a 52-week low

Key Takeaways:

• Nio reported an adjusted profit in the second quarter, as its net loss also narrowed significantly
• The new energy vehicle maker’s adjusted profit and gross margin both fell sequentially in the second quarter from the first

By Cheng Shui Tong

The uphill slog continues for electric vehicle (EV) maker Nio Inc. (9866.HK; NIO.US), as it stays locked in a race for survival with dozens of Chinese rivals. That said, the company’s second-quarter results, released last week, show it continues to stay near the front of the pack in that race.

Nio reported its net loss narrowed by 86% in the latest three-month period to 722 million yuan ($108 million) from 5.14 billion yuan a year earlier. It was profitable on a non-GAAP basis, reporting an adjusted profit of 24.8 million yuan for the period, reversing a 4.13 billion yuan loss a year earlier. Significantly, the latest figure marked Nio’s third consecutive quarter of adjusted net profits.

Its second-quarter revenue also rose by a healthy 69% year-over-year to 32.1 billion yuan, while its gross margin reached 18.4%, up 8.4 percentage points from a year ago. While those figures marked a substantial improvement year-on-year, they represented some backsliding from the first quarter. Specifically, Nio’s second quarter adjusted profit was down 44% sequentially, while its gross margin fell by 0.6 percentage points over that time. That may partly explain why Nio’s U.S. stock fell after the announcement, dropping below the $4 mark to trade near a 52-week low.

Turnaround story

Nio’s stock has been through ups-and-downs since it listed on the New York Stock Exchange in 2018. It hit an all-time low of about $1.20 the next year, but then staged a massive rebound just a year later to reach an all-time high over $62 in February 2021.

Like many of its peers, Nio has consistently lost money. Despite that, the stock initially soared after the company made a remarkable turnaround from a near collapse in late 2019, when founder William Li was dubbed the “most miserable man” of that year. But then the company got a massive 7 billion yuan lifeline from funds tied to the city of Heifei, capital of Anhui province where it has close ties, in April 2020. Nio clawed its way back from there, banking on its premium market positioning and flagship battery-swapping technology. As that happened, its total deliveries rose to more than 43,000 vehicles in 2020, more than double the previous year’s figure.

Assisting Nio’s case, shares of the global EV leader Tesla (TSLA.US) started to soar at that time. That helped to light a fire under Nio’s stock, as Wall Street investors increasingly viewed the company as the “Tesla of China.”

Six years later, Nio has achieved an operating profit, with annual new car deliveries exceeding 400,000 units — a nearly tenfold increase from those earlier days. So why is its stock hovering near a 52-week low, sitting at less than 10% of its peak? Market enthusiasm was strong in the earlier days, as investors applauded the company for its near-death survival, multiplying sales, and favorable policy tailwinds in its home China market. Many investors were also optimistic that EVs would disrupt the entire auto industry, awarding Nio a hefty premium as a leader in the field.

Fast forward to the present, when those lofty expectations have evaporated. While EV penetration rates have climbed significantly, so have the number of companies entering the market, igniting cutthroat competition and brutal price wars. Making matters worse is the gradual phase-out of national subsidies for new energy vehicles (NEVs) in China, the world’s largest market for such cars. That confluence of factors has slammed the brakes on most companies’ formerly sky-high valuations, sending their shares into a tailspin.

Entering the decisive phase

Speaking at a recent forum, Nio Chairman William Li pointed out that China’s auto industry is entering its most brutal and decisive phase — a critical juncture that will determine who survives over the next three to five years. He noted the significance of branding is rising as products become increasingly undifferentiated, even as carmakers are forced to keep spending heavily on R&D and upgrades to their technology and service networks to stay apace with the field.

That raises the question of whether Nio will emerge as a survivor in this Chinese auto race. Despite its low stock price, there are also reasons for optimism. For one, Nio’s strong performance in the premium segment has bolstered customer loyalty, leaving room for price hikes. The Nio brand has maintained its lead in the domestic high-end market, winning the company an average transaction price of 400,000 yuan in the second quarter. That climbed further to 430,000 yuan in July, surpassing figures for Mercedes-Benz, BMW, and Audi, ranking Nio first among mainstream luxury brands.

Nio’s battery-swapping model, cultivated over the years, has also given the company an advantage, making its products harder to substitute. Unlike traditional EVs that rely on charging stations, Nio’s fully automated process allows drivers to complete a battery swap in just three minutes without leaving their vehicles — more efficient than standard fast-charging. Around 60% of Nio owners currently utilize that service. That approach also facilitates the decoupling of vehicles and batteries. Buyers can purchase cars without batteries, saving tens of thousands of yuan upfront. They then pay monthly subscription fees instead, with Nio responsible for battery maintenance.

This not only improves efficiency for car owners but also deepens their reliance on the brand and positions Nio as a leader in battery-swapping infrastructure.

Major banks lower target prices

Nio may look competitive over the longer term, but its second-quarter performance fell broadly short of expectations, prompting major banks to slash their price targets, further pressuring the stock. Bank of America zeroed in on Nio’s second-quarter gross margin contraction on a sequential basis, even though it improved year-over-year. It also noted that Nio’s operating expenses accounted for 19.5% of sales, slightly higher than anticipated. As a result, BofA lowered its target price for Nio’s Hong Kong-listed shares from HK$47 to HK$40 and maintained a “neutral” rating.

At the same time, cost pressures for manufacturers are impossible to ignore. Nio’s management indicated that the average cost per vehicle in the second quarter rose by approximately 14,000 yuan compared with the fourth quarter of last year. They projected a further increase of 2,000 yuan to 3,000 yuan in the second half of the year, which could put further pressure on the company’s gross margin.

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