NIO: Time To Get Moving

Summary:

• NIO reported weak Q1 numbers as it prepares to launch its lower-priced Onvo brand.
• Revenues declined over 7% and missed estimates, but vehicle margins did improve.
• NIO’s cash on the balance sheet decreased, potentially increasing the need for another capital raise before the Onvo launch.

Before the opening bell on Thursday, we received first quarter results from NIO (NYSE:NIO). The Chinese electric vehicle name reported dismal numbers for the period amidst tough competition, yearly model refreshes, and a seasonally weaker sales period. Now that the company is getting ready to launch its lower priced Onvo brand, it is time for management to finally deliver the growth story that investors have been hoping for.

Previous coverage of NIO:

Back in early March, I had my most recent article on the name published when the company reported its Q4 2023 results. At that time, the company had guided to Q1 deliveries well below what the street was expecting, and management revealed its near term focus would be on delivery volume growth instead of gross margin progress.

At that time, I had a sell rating on NIO shares because the stock traded at a significant premium to other comparable EV makers. I was hoping for another capital raise in the near term to help the balance sheet ahead of the mass market brand launch, and I thought that could weigh on sentiment in the near term. Since that time, NIO shares have lost more than 9%, while the S&P 500 is up almost 5%.

Q1 results:

For the period, NIO reported total revenues of $1.37 billion, representing a decline of more than 7% over the prior year period, and missing street estimates for $1.44 billion. While deliveries were only down 3.2%, vehicle revenues were down more than 9%, due to a lower average selling price as a result of user rights adjustments since June 2023.

The good news is that NIO is making progress on its vehicle cost structure. Vehicle margins were up 410 basis points year over year to 9.2%, helping overall gross margins to rise 340 basis points to 4.9%. Unfortunately, NIO is still spending quite a bit on operations to grow the business, resulting in increased operating and net losses over Q1 2023.

As NIO continues to lose large sums of money, the company is burning through a bit of cash. At the end of Q1, NIO had $6.3 billion of cash on the balance sheet, down from $8.1 billion at the end of 2023. As the chart below shows, working capital declined by more than $678 million sequentially. I continue to believe another meaningful capital raise is needed here, especially to get through the launch of the Onvo brand. Reports that the company is starting to build out a third factory only add to that notion, given how capital intensive this industry is.

Looking forward:

Over the past couple of years, NIO has struggled to meet ambitious growth targets. We’ve seen multiple quarters interrupted by Covid, supply chain issues, production line upgrades, etc. Management’s plan to get to 30,000 deliveries a month in early 2023 did not work out at all, and the company hasn’t even reported a full quarter where it did 20,000 units a month. The chart below shows a 3-month rolling average of vehicle deliveries.

For Q2, NIO guidance was somewhat mixed. The company guided to revenues of $2.297 billion to $2.373 billion, which was well ahead of the average street estimate for $1.99 billion. However, management called for vehicle deliveries in a range of 54,000 to 56,000, which I find a little disappointing given that April and May combined for over 36,150 deliveries already.

The next stage of growth will really come once the new, lower priced Onvo brand hits the market later this year. Initially, the target seems to be for about 10,000 units a month of the L60 mid-size SUV, and a second model is expected to follow in 2025. Revenue growth is expected to significantly accelerate in 2025 as a result, but it will be interesting to see how margins fare as NIO enters a new segment of the market that’s a bit more competitive.

The valuation has improved, but not enough:

When I looked at NIO back in March, the company was trading at about 1.25 times its expected 2025 revenues. At that point, that valuation was quite a bit above the 0.77 times that three other comparable names in the space averaged. Since then, Fisker (OTC:FSRN) has essentially gone bankrupt, so I can’t really use that name as a comparison anymore.

Given Thursday morning’s decline, along with a rise in 2025 revenue estimates, NIO shares now go for about 0.75 times estimated sales for next year. While that number is slightly below the roughly 0.80 times that competitor XPeng (XPEV) goes for, it’s still quite a bit above the 0.33 times that Polestar (PSNY) is going for. Thus, NIO has gone from trading at about a 62% premium to the average of three names to a 31% premium to two.

Final thoughts / recommendation:

It was a tough start to 2024 for NIO, as the company ended up missing Q1 revenue estimates that had come down quite significantly. While gross margins did improve over the prior year period, the EV maker is still losing a lot of money. Q2 guidance was decent, but I’d really like to see the company raise some more money ahead of the Onvo launch later this year.

At the moment, I’m continuing to rate NIO shares as a sell. The valuation is still a bit rich for my liking, at least until we get one more meaningful capital raise. I want to see the company show at least another quarter or two of deliveries at a high rate from the core brand, and we need to see if there are any growing pains once Onvo enters the fold. If NIO can make a little more progress on the margin front and improve its balance sheet a bit, I will look at my rating again in a couple of months.

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