NIO Stock: Growth At All Costs May Not Last (NYSE:NIO)

Introduction

I remain bearish about NIO (NYSE:NIO) and want to reiterate my ‘Strong Sell’ rating for the stock. The stock declined by 2.4% since my previous thesis. My previous thesis could have looked even better, but the stock gained more than 6% yesterday after positive Q2 deliveries data. NIO’s latest deliveries report is really impressive with sales more than doubling in Q2. On the other hand, this growth might be unsustainable because it looks like a ‘growth at all costs’. I think so because Q1 financial performance was quite disappointing with soaring cash burn. NIO’s profitability metrics are way behind its closest rivals, which also underscores prioritizing ‘growth at all costs’. I expect more dilution soon, which will probably make NIO’s unattractive valuation look even worse. Considering all these factors, I believe that NIO’s yesterday rally was more a ‘dead cat bounce’ rather than a sustainable rebound.

Fundamental analysis

The most fresh fundamental information about NIO is its Q2 2024 deliveries. The quarter’s deliveries totaled 57,373 vehicles, increasing by 144% YoY. The increase is impressive, the market reacted by showing a big intraday rally. NIO’s Q2 deliveries growth outperformed its closest rivals like Li Auto (LI) and XPeng (XPEV). On the other hand, Li Auto’s deliveries are twice as high as NIO’s. Growing against larger numbers is usually more difficult.

NIO delivered a total of 87,426 during the first half of 2024, compared to 54,561 units in H1 2023. The increase is 60%. According to the last November’s information, NIO’s target for the full year is 230,000 units. With that being said, NIO needs to deliver 142,574 cars in H2 2024. Thus, NIO should demonstrate a 35% increase in deliveries during the second half of the year. This looks doable considering strong growth momentum of the Q2.

Despite the impressive growth in the volume of cars sold, NIO’s financial performance is not improving. Of course, we do not have Q2 earnings yet, but financial metrics of Q1 were disappointing. The operating margin dipped below -50% and it was much weaker both compared YoY and QoQ. As a result, NIO’s outstanding cash balance decreased by around $1.7 billion sequentially. The company’s balance sheet continues shrinking at a notable speed. This will likely lead to the issuing of new shares, and the recent stability in the number of shares outstanding will be disrupted.

NIO’s impressive H1 deliveries growth was likely achieved with a ‘growth at all costs’ strategy. I made this conclusion by comparing the company’s profitability metrics with rivals. NIO’s profitability still looks poor compared to LI and XPEV. Comparing with Li might be unfair due to the big gap in scales of these two companies. However, XPEV delivers less cars than NIO and its profitability metrics look better.

NIO’s revenue per employee is two times lower than Li’s and 25% lower compared to XPEV. This indicates that NIO does not prioritize efficient and profitable growth, which is not a sustainable approach to building value for shareholders.

The management did not announce exact global expansion plans, but opening ‘NIO houses’ across Europe suggests that they had ambitious plans in this direction. The recent introduction of additional tariffs on Chinese EVs by the EU is a serious fundamental headwind for NIO’s plans to expand internationally. Expansion to the U.S. market already looks impossible for Chinese EVs after Joe Biden introduced a 100% tariff.

Valuation analysis

I use the discounted cash flow (‘DCF’) approach to update my valuation analysis for NIO. I use a 12% WACC, as recommended by Finbox. I rely on the FY 2024 revenue consensus forecast of $9.38 billion and use a linear 17.15% CAGR for 2025-2028.

NIO is still not profitable and the level of uncertainty regarding the free cash flow margin is very high. However, Tesla (TSLA) first achieved sustainable positive FCF starting in FY 2019 (please see above) when it had already surpassed $20 billion in revenue. Therefore, I assume that to generate at least 1% in FCF, the company must surpass $15 billion in revenue. Therefore, I expect NIO to start generating positive FCF no earlier than FY 2027, with a slow expansion. According to Seeking Alpha, there are 2.07 billion outstanding NIO shares at the moment. I project a 4% constant growth rate because NIO operates in an industry that enjoys solid positive secular transitions.

The fair share price is $1.36, three times lower than yesterday’s closing price. This financial model is very sensitive to changes in constant growth rate. However, even upgrading the rate to unrealistic 8% does not make NIO’s stock attractively valued. Therefore, I do not find NIO’s valuation attractive at all.