NIO: Weak Earnings, Poor Prospects

Summary:

• NIO Inc. reported mixed annual earnings results, with increased vehicle sales but decreased profitability.
• The company’s financial fundamentals are weak, with a low current ratio and high debt/equity ratio.
• NIO’s stock is not undervalued and faces downside risks, but also has potential for growth in the EV industry.

NIO Inc. (NYSE:NIO) reported a mixed set of annual earnings results. The company has been loss-making for a while. Although this is my first article on this EV maker, I have covered its rivals before, including Tesla (TSLA) and Lucid (LCID). Overall, the sector has growth potential, but most of the companies operating in this industry are either highly expensive or loss-making. NIO is loss-making and not very cheap if we look at its valuation ratios. But let me dive into more details about the company’s last set of results as well as its other fundamentals.

NIO 2023 earnings results

NIO reported its 4Q 2023 and full-year 2023 results.

Here is a summary of the company’s quarterly results:

• Vehicle sales totaled RMB 15,438.7 million, or $2,174.5 million, in the fourth quarter of 2023. This was an increase of 4.6% compared to the fourth quarter of 2022 and a decrease of 11.3% compared to the third quarter of 2023.
• Total revenues were RMB 17,103.2 million, or $2,408.9 million, in the fourth quarter of 2023. This was a rise of 6.5% compared to the fourth quarter of 2022 and a fall of 10.3% compared to the third quarter of 2023.
• Gross profit totaled RMB 1,279.2 million, or $180.2 million, in the fourth quarter of 2023. This was a rise of 105.7% compared to the fourth quarter of 2022 and a fall of 16.0% compared to the third quarter of 2023.
• Net loss totaled RMB 5,367.7 million, or $756.0 million, in the fourth quarter of 2023. This was a reduction of 7.2% compared to the fourth quarter of 2022 and a rise of 17.8% compared to the third quarter of 2023.

I would say that the 4Q 2023 results were better than the 4Q 2022 earnings. But the last set of results was worse than that published for Q3 2023. However, we can attribute these differences to seasonal fluctuations. So, it would make sense to see the annual results.

I have prepared tables and graphs showing NIO’s quarterly revenues and profits.

NIO’s quarterly revenues (in dollars, rounded to the nearest million)

	Dec 2021	Mar 2022	Jun 2022	Sep 2022	Dec 2022	Mar 2023	June 2023	Sep 2023	Dec 2023
Revenues	1558	1563	1536	1828	2329	1555	1209	2612	2409

Click to enlarge

Source: Seeking Alpha

NIO’s quarterly revenues (in $million, rounded to the nearest million)

NIO’s quarterly profit (in $million, rounded to the nearest million)

	Sep 2021	Dec 2021	Mar 2022	Jun 2022	Sep 2022	Dec 2022	Mar 2023	June 2023	Sep 2023	Dec 2023
Gross profit	309	267	228	200	244	97	24	12	209	180
Net profit	(443)	(343)	(288)	(410)	(582)	(848)	(700)	(844)	(634)	(756)

Click to enlarge

Source: Seeking Alpha

NIO’s quarterly profit (in $million, rounded to the nearest million)

Here is a summary of the company’s annual results:

• Vehicle sales totaled RMB 49,257.3 million, or $6,937.7 million, for the full year 2023, a rise of 8.2% vs. the previous year.
• Total revenues were RMB 55,617.9 million, or $7,833.6 million for the full year 2023, a rise of 12.9% compared to the previous year.
• Gross profit totaled RMB 3,051.8 million, or $429.8 million, for the full year 2023, a fall of 40.7% compared to the previous year.
• Net loss totaled RMB 20,719.8 million, or $2,918.3 million, for the full year 2023, a rise of 43.5% compared to the previous year.

Overall, we can say that the company’s sales increased while its profitability decreased.

Below, you can see that the company’s revenues have been rising very fast. At the same time, the company cannot convert its sales into profits.

Nio’s annual revenues (in dollars, rounded to the nearest million)

	Dec 2018	Dec 2019	Dec 2020	Dec 2021	Dec 2022	Dec 2023
Revenues	720	1124	2491	5686	7144	7834

Click to enlarge

Source: Seeking Alpha

Nio’s annual revenues (in $million, rounded to the nearest million)

NIO’s annual profits (in $million, rounded to the nearest million)

	Dec 2018	Dec 2019	Dec 2020	Dec 2021	Dec 2022	Dec 2023
Gross profit	(37)	(172)	287	1073	752	430
Net Income	(3391)	(1639)	(860)	(1664)	(2111)	(2918)

Click to enlarge

Source: Seeking Alpha

NIO’s annual profits (in $million, rounded to the nearest million)

As you can see from the diagram above, the gross profit has hardly risen over the past six years. The net loss is similar to the 2018 period, when the company was a new EV player. In fact, NIO has never managed to record a positive net profit. This is mostly due to high and rising operating expenses.

In 2023, research and development expenses were RMB 13,431.4 million, or $1,891.8 million. This was an increase of 23.9% compared to the previous year. In 2023, general and administrative expenses totaled RMB 12,884.6 million, or $1,814.8 million, a rise of 22.3% compared to the previous year.

So, we can say that NIO is not particularly efficient right now. But let me dive into NIO’s financial position.

NIO’s financial fundamentals

In my view, NIO’s financial fundamentals are not particularly strong right now.

NIO’s current ratio history

2016	2017	2018	2019	2020	2021	2022	2023
1.20	5.14	1.42	0.52	3.31	2.18	1.29	1.09

Click to enlarge

Source: Prepared by the author based on Seeking Alpha’s data

We all know that a good current ratio should be above 1.5. This is not the case with NIO right now. The ratio used to be 1.29 in 2022 and 1.09 in 2023.

NIO’s debt/equity ratio

2016	2017	2018	2019	2020	2021	2022	2023
0.87	0.30	1.31	(4.02)	0.71	1.18	2.48	4.20

Click to enlarge

Source: Prepared by the author based on Seeking Alpha’s data

As concerns the company’s debt/equity ratio, it should not be above a level of 2.0. NIO’s D/E is 4.20, substantially higher than 2.0.

NIO’s interest coverage ratio

Interest coverage ratio is calculated by dividing the EBIT by the interest expense. However, as you can see from the excerpt below, NIO’s EBIT has been negative since 2016. In fact, this indicator has been worsening for a while.

As I have mentioned in the previous section, the company’s profitability is quite poor. According to GuruFocus, even the company’s gross profit margin is substantially below the industry’s average. The other margins below are negative because the operating and net profits, as well as the free cash flow, have been negative for a while.

Although the EV industry is not particularly profitable, NIO’s profitability indicators are even worse.

Valuations

In my view, NIO is not too undervalued, even though its stock is trading at multi-year lows. I will explain why.

As I have mentioned above, NIO is not profitable right now. So, it is impossible to use the P/E ratio to value the company.

But NIO’s EV/Sales and P/S are quite average. Both of these indicators should be between 1 and 3. NIO’s are 1.43 and 1.38, respectively. You might say that it is good. Maybe, but not for a loss-making company. Also, a normal P/B ratio should be between 1 and 3. NIO’s is 4.66. Given its weak financials, the company is not cheap, according to this indicator.

Overall, I would say that NIO is not very cheap, according to its valuation ratios.

Upside risks

NIO faces a number of upside risks in spite of the fact that its financials are not brilliant.

• First, the industry it operates in has been growing quite well for a while. Although the growth rate has slowed down somewhat, EV demand in 2024 is still forecast to rise by 36%. So, NIO can turn profitable thanks to the general demand increase.
• The company might raise its market share in China. In 2023, it was very small, just over 2%. That might mean the company has plenty of growth potential.
• There could be a soft landing for the global economy if the Fed and other central banks decrease interest rates on time.
• NIO’s shares are trading at multi-year lows. So, there is a risk they might bounce back.

Downside risks

The downside risks are more obvious.

• First, there is a recession risk. If there is a full-scale economic downturn, then the company might obviously face lower demand for its products.
• The company has quite poor financials and is not profitable. But if there is an economic crisis, things might get even worse.
• NIO’s stock is not too cheap, according to the valuation multiples.

Conclusion

NIO reported a mixed bag of results. It has not managed to reach profitability. In fact, its expenses are rising higher than its sales. The company’s stock is trading at multi-year lows even though its valuation ratios do not suggest undervaluation. My rating on the stock is “hold” due to the fact that NIO operates in a fast-growing industry and its stock price touched multi-year lows.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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