William Li, CEO of Nio Chinese multinational automobile manufacturer, stands next to Nio ET7 model ... [+]
The American Depository Receipts of Nio, a Shanghai-based electric vehicle maker, just popped 20%, according to CNBC. Yet the ADRs trade a whopping 92% below their all-time high of $67.
Does that make Nio shares a bargain?
The answer depends on whether Nio — which reported 134% vehicle delivery growth in April, CNBC noted — can sustain such rapid growth.
And that brings back memories of March 2022, the last time I wrote about Nio in a Forbes post.
Back then, the company had just reported 49% revenue growth. Nio’s good news was not sustained and Nio stock — 9.75% of whose which is sold short, notes the Wall Street Journal — now trades 75% below $20 — the price at which the shares traded in March 2022.
Nio sounds an optimistic note about its prospects. On April 30, the company began shipping its new 2024 ET7 executive sedan and recently entered into a cooperation agreement with luxury EV maker Lotus Technology on EV charging and battery swapping, reported Dow Jones.
While analysts’ price targets envision a whopping 751% upside in Nio’s ADRs, some analysts view the recent stock price pop as short covering.
I think Nio will face significant challenges sustaining its growth due to the inherently unprofitable structure of the Chinese EV industry, fierce price competition among EV rivals, and Nio’s high cash burn rate.
Nio’s Soaring Deliveries
Nio deliveries rose rapidly in April 2024. Specifically, Nio delivered 15,620 vehicles in April, a 134.6% increase from the year before, CNBC reported. The company has also expanded its battery swap partnerships in a bid to lower consumers’ anxiety about driving range, noted CNBC.
Many Chinese rivals also enjoyed growth in April. BYD sold 313,245 EVs in April, up 3.6% from the month before; Xpeng’s April EV deliveries rose 4% to 9,393; while Li Auto suffered an 11% decline in April shipments to 25,787, reported CNBC.
Due to the release of new models and lower battery costs for consumers, Nio’s shipments increased far faster — up 32% — from March 2024 deliveries of 11,866, the Journal noted.
Can Nio Sustain Rapid Growth?
Nio competes in an inherently unprofitable industry and there is no guarantee the company can sustain its rapid growth.
Due to low barriers to entry in the Chinese EV market, the average participant is losing money, noted researcher Frost & Sullivan.
The low entry barriers attract rivals willing to compete on price. For example, in early April, Chinese smartphone maker Xiaomi launched its SU7 EV priced about $4,000 less than Tesla’s Model 3. Xiaomi CEO Lei Jun said the SU7 would have a longer driving range and the company expects to break even sooner, despite a lower price than the Model 3, noted CNBC.
Nio’s ability to prevail in a price war is unclear. In 2023, the company burned through $2.3 billion worth of free cash flow — ending the year with $5.5 billion in cash and $3.3 billion in long-term debt, the Journal notes.
If there was hope Nio could become profitable, the company’s free cash flow conflagration would not be so concerning. However, analysts estimate losses through 2025 — with negative median analyst earnings per share estimates as follows, according to MarketWatch:
- Q1 2024: -$2.18.
- Q2 2024: -$2.01.
- FY 2024: -$8.38.
- FY 2025: -$5.44.
Where Is Nio Stock Headed?
Analysts are incredibly bullish about Nio stock. The median analyst stock price target for the EV maker is a whopping $46.80, according to MarketWatch — representing 751% upside.
If these analysts are correct, there is no reason not to buy the stock.
Sadly, other analysts do not view the rally in Nio shares as sustainable. Before Thursday’s rally, Nio shares had lost about half their value in the first four months of 2024 as the “price war in China’s EV market intensified,” noted the Journal.
Two analysts fingered unpleasantly surprised short sellers for the pop in Nio’s stock. Daiwa analyst Kelvin Lau attributed Nio’s price rise to short-covering. “A short squeeze drove the share-price rise,” CCB International analyst Qu Ke told the Journal.
If Nio stock can continue to report faster-than-expected growth, the short-sellers will continue to bid up the stock. If not, their bearish bets could still pay off.
