NIO Stock: Fundamentally Weak and Overvalued (NYSE:NIO)

My thesis

NIO (NYSE:NIO) is at the moment dealing with many challenges. The corporate’s working losses are deepening as provides ramp up, that means its automotive costs must be adjusted. Nevertheless, elevating costs is most probably inconceivable attributable to competitors february and tesla (TSLA) continues the value struggle in China. Nevertheless, an exit from this troublesome scenario appears inconceivable, and in my view NIO is able to proceed burning cash. Due to this fact, I like to recommend a robust promote on the inventory. Furthermore, my DCF mannequin reveals that the inventory has 34% draw back potential.

NIO inventory evaluation

NIO is a Chinese language electrical car firm recognized for its battery substitute technique to handle China’s poor charging infrastructure for electrical automobiles. In accordance with NIO’s newest 20-F SEC submitting, the corporate is positioning itself as a frontrunner in premium good electrical car market. As I analyze NIO’s aggressive panorama in my evaluation, I’ll subsequently examine its choices with different premium electrical car producers. Tesla is a reputation that involves thoughts once we speak about premium electrical automobiles. German producers of classic premium automobiles akin to Mercedes-Benz (OTCPK: MBGAF), BMW (OTCPK:BMWYY), and Audi too very fashionable within the Chinese language luxurious section. Due to this fact, I take into account these 4 corporations to be direct opponents of NIO.

Though the corporate is younger, NIO already affords 9 fashions to the market, together with sedans, tourers, SUVs and coupe SUVs. Within the desk beneath, I summarize the data relating to the costs of the NIO fashions from cnevpost.com. The final two columns within the desk beneath have been added by me based mostly on a comparability of the fashions with one another and the costs of competing fashions in China that I discovered from open sources on the Web. As we are able to see, NIO fashions are considerably cheaper than all fashions of German producers and high Tesla fashions. Nevertheless, NIO’s smallest fashions are considerably costlier than the Tesla 3 and Mannequin Y, that are manufactured on the Giga Shanghai manufacturing facility.

Nevertheless, NIO appears to have a worth benefit in its high-end fashions. Then again, it will be ridiculous to match the facility of the NIO model with German automakers and even Tesla. The perceived price-to-quality ratio, or manufacturers, is sort of subjective, and it is laborious to come back to a really dependable conclusion as as to if or not NIO’s pricing helps it compete. So I want to take a look at the provision numbers, which most likely characterize a good illustration of NIO’s power relative to the competitors. It was inconceivable to seek out China 2023 EV deliveries from German corporations. Nevertheless, one supply means that Mercedes and BMW will double their gross sales of electrical automobiles in China in 2023. Then again, the CEO of Volkswagen (OTCPK:VWAGY) Group stated that Audi’s automotive lineup just isn’t aggressive in China. Since Tesla sells solely electrical automobiles, it was not troublesome to match the dynamics of its gross sales in China in 2023 and 2022 with NIO.

Tesla’s gross sales in China greater than doubled in 2023 in comparison with 2022, whereas NIO confirmed 31% progress. Please additionally remember the fact that Tesla confronted a lot bigger numbers in comparison with NIO, and the hole in absolute phrases is greater than tenfold. Nevertheless, based mostly on NIO’s gross sales efficiency between 2023 and 2022 in comparison with Tesla, Mercedes, and BMW, I can say that its worth benefit just isn’t doing a lot to remain forward of the competitors. For my part, clients are usually not prone to view NIO’s decrease promoting costs as a greater worth proposition in comparison with three of the 4 important opponents.

Other than not having a aggressive benefit by way of bodily gross sales, NIO’s present pricing for its fashions is, in my view, unsustainable by way of monetary efficiency. Regardless of ​​spectacular income progress in recent times, NIO’s gross and working income have deteriorated. Which means the pricing coverage works in opposition to the corporate’s monetary success, because the extra automobiles it sells, the extra working losses it incurs.

As we are able to see beneath, elevated provide doesn’t assist enhance NIO’s profitability profile. Due to this fact, the corporate must make an upward adjustment within the pricing of its fashions, and it will theoretically assist in bettering margins. Nevertheless, in follow, NIO doesn’t have the model power to have the ability to use pricing energy with out shedding clients. Furthermore, elevating costs definitely will not work if Tesla continues its worth struggle.

So the findings for NIO are very disappointing. A provide ramp-up will increase the corporate’s working losses, and the corporate is unlikely to have the ability to modify costs upward. The corporate is burning money at an amazing fee, which we are able to see within the heavy losses and mounting whole debt, which has greater than tripled within the final 5 years. Furthermore, the overall variety of widespread shares excellent doubled throughout the identical interval.

The White Home’s latest package deal of measures included a 100% border tax on electrical automobiles from China. It is a vital unfavourable improvement for NIO, because it seemingly implies that Chinese language automakers are unlikely to have the ability to compete on worth when the 100% tariff is added to the promoting worth. Current information means that the European Union is contemplating an identical transfer to guard native automotive corporations and the roles of individuals employed within the business. For the reason that US and the EU are the biggest export markets for Chinese language corporations, these strikes considerably restrict NIO’s export potential.

In abstract, my bearishness on NIO stems from a number of worrying indicators. It’s troublesome for the corporate to compete in a crowded market, the profitability profile doesn’t match income progress and up to date developments present that NIO’s export potential is at the moment fairly restricted.

Calculation of personal worth

As I discussed earlier, NIO could be very loss-making, which makes it inappropriate to research valuation ratios based mostly on earnings. For a loss-making firm like NIO, the discounted money movement (DCF) method might be the one method to calculate intrinsic worth. In accordance with DCF, the longer term money flows should be discounted and I would like to determine the low cost fee. Within the paper beneath, I’ve outlined my WACC calculation and defined the sources of all my assumptions.

After determining the WACC, I can begin making different assumptions. Since NIO’s latest historical past of earnings progress has been notably unstable and remains to be loss-making, the extent of uncertainty surrounding my assumptions will probably be extraordinarily excessive additionally as a result of consensus estimates are extremely unstable. I am solely utilizing Wall Road expectations for the bottom yr earnings guess, and the remaining will probably be based mostly on different sources. Due to this fact, the bottom yr income is $9.09 billion and the income CAGR for subsequent years is 8.61%. Because of the weaknesses described within the inventory evaluation, it is vitally troublesome to foretell the free money movement (FCF) dynamics of NIO. So some form of rule of thumb ought to apply right here, and I will forecast FCF margin enlargement of fifty foundation factors annually. I embody a 4% perpetual progress fee attributable to strong secular tendencies within the EV business. I additionally add up NIO’s money place and subtract the overall debt, these quantities had been recorded on the corporate’s steadiness sheet as of December 31, 2023.

NIO’s intrinsic worth is 34% beneath its market cap, suggesting the inventory is overvalued. My goal worth for NIO is $3.15.

What can go mistaken with my thesis?

Regardless of all of the shortcomings and powerful competitors, NIO continues to spend money on the event of its enterprise, as a result of among the many shareholders there’s a wealthy investor, the CYVN Holdings fund from Abu Dhabi. I have not discovered a lot details about this fund on-line by way of its belongings below administration (AUM) to gauge its funding potential. Nevertheless, the inspiration has already invested billions of {dollars} in NIO, and it is no secret that Abu Dhabi is an oil-rich nation, that means CYVN’s pockets are seemingly deep sufficient to proceed supporting NIO’s operations and innovation. For instance, on Might 15, NIO launched its low-cost Onvo model, which might assist enhance NIO’s income construction and develop into new segments.

Current information additionally means that NIO is engaged on the launch of two new mass market fashions for the European market, and if one in every of these fashions turns into a bestseller, this could possibly be a tipping level for NIO, which will probably be absorbed by the extremely optimistic market and work in opposition to my bearish thesis. Nevertheless, if the EU introduces elevated tax obstacles for Chinese language electrical automobiles, this potential optimistic catalyst will stay unrealized.

Abstract

NIO is in a really troublesome scenario the place worth correction appears to be the one method to cut back losses and burn cash. Nevertheless, such a situation would seemingly lead to a big lack of market share attributable to stiff competitors, particularly from Tesla. The score would not look good both, in my view.

Editor’s Observe: This text discusses a number of securities that aren’t traded on a serious US change. Pay attention to the dangers related to these shares.