NIO (NYSE: NIO) is a Chinese electric vehicle maker that has experienced a precipitous fall from grace from the highs its stock price reached amid the COVID-19 pandemic. Over the past three years, shares have fallen 86%. However, according to the analysts at JPMorgan (NYSE: JPM), there may be light on the horizon for the consumer discretionary firm.
The company raised its price target on NIO stock from $5.30 to $8 in the first week of September. This price target signals the company's shares could rise 50% from their current level. So, what is with the current state of NIO, how does it compare to peers, and is the stock a buy now?
NIO: Impressive Growth, but Profitability Is the Question
NIO positions itself as a premium EV maker, selling its products in China, Norway, Germany, the Netherlands, Denmark, and Sweden. However, it also recently announced a new vehicle and secondary brand. The Onvo L60 will go on sale on Sept. 19 and has a lower price point, meant to appeal to a wider range of customers. It competes directly with the Tesla (NASDAQ: TSLA) Model Y, undercutting the vehicle's price by over $4,000.
NIO has seen substantial growth in its sales through the first part of this decade. The company’s revenues for the last twelve months (LTM) since the middle of 2020 have grown by over 6x to $8.74 billion. However, achieving profitability, or even growing consistently closer to it, has been a significant problem.
In early 2021, the company’s operating margin nearly turned positive, a milestone many up-and-coming firms aim to achieve. But since then, the figure has moved deeply negative. In Q2 of 2023, the LTM operating margin hit -45%. It recovered meaningfully to -34% last quarter, but the firm still isn’t anywhere close to making money.
Comparing NIO to Its Chinese Peers
NIO can start making money at some point. Competitor Li Auto (NASDAQ: LI) recently was able to get over the hump, seeing its LTM operating margin turn positive in Sept. 2023. However, it still shows inconsistency in keeping the figure positive on a quarter-to-quarter basis.
It could be argued that NIO needs more sales to create economies of scale to achieve profitability. Li’s LTM revenues are over double that of NIO’s. However, Li’s margins were infinitely closer to being positive when its sales were at similar levels to what NIO’s are now.
NIO's valuation is relatively similar to that of peers such as XPeng (NYSE: XPEV) and Li. However, the company doesn’t seem to offer much in the way of superior fundamentals. The company’s forward enterprise value to sales (EV/S) ratio is 0.9x, higher than the two other firms.
This is even though both firms have gross profit margins 400 to 1000 basis points higher than NIO. Li's net income margin is the only positive figure of the three, and XPeng’s is significantly less negative than NIO’s.
NIO is also being hit by tariffs from its only market outside of China, the European Union. NIO got hit with a 21% tariff for sales in the economic bloc. Although most of its revenues still come from China, operating in these markets requires energy and resources that may not be worth it in the long term.
The U.S. and the EU have remained resolute in their willingness to protect their domestic auto industries, and that doesn’t feel likely to relent any time soon. Companies like Li don’t face this issue, as they only sell in China.
NIO: Making Good Moves, but Li is More Proven
NIO’s new launch of its lower-priced brand feels like a good move to increase its margins in the long term. It should be able to increase overall vehicle sales significantly, helping create the scale it needs to improve its margins. However, it's hard to say that the firm offers better value than Li Auto.
Li has already shown its ability to make money. Also, NIO’s expected compound annual revenue growth rate of 31% doesn’t blow Li’s 26% number out of the water by any means. This is especially true as Li’s total revenues last quarter were 81% higher than NIO’s. A faster growth rate for NIO would be good to see, considering this difference in total revenue.
Additionally, Li’s sole focus on China allows it to streamline efforts more, not trying to compete in EU markets where the odds are stacked against them. The company also boasts support from a wider assortment of analysts with an average price target implying an upside of 47%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
