NIO Inventory: Damaged Development Story Doubtless Getting Worse

In my February 2024 NIO article, I reminded NIO Inc. (NYSE:NIO) traders holding on to their NIO shares that they have been prolonging their ache within the battered pure-play Chinese language premium EV maker. I urged traders to keep away from catching NIO’s falling knife, as the shortage of a hybrid technique may result in a second of reckoning for unprofitable NIO.

NIO reported its fourth-quarter earnings launch in early March 2024. As a reminder, NIO supplied Q1 deliveries steerage of between 31K and 33K autos. Nonetheless, the corporate’s replace in late March downgraded NIO’s Q1 deliveries outlook to about 30K autos. Subsequently, NIO’s overpromising and underdelivering methods of 2023 have reemerged, as NIO’s final Q1 deliveries of 30.05K autos missed even the low finish of its preliminary Q1 steerage.

As seen above, NIO delivered about 159K autos over the past twelve months. It stays beneath the highs struck in January 2024, suggesting the corporate continues to battle with producing the required scale resulting in worthwhile progress. As a reminder, NIO administration did not present a direct reply to an analyst who requested:

My first query is about 2024 quantity goal, within the report you goal 200,000 items for full yr ’24 which suggests 25% progress. Are you able to affirm what’s your goal? (Nio This fall 2023 earnings name)

CEO William Li responded, reminding traders that competitors is anticipated to be “intense” in 2024 however did not talk a full-year goal. Nonetheless, NIO administration emphasised that NIO is “assured” in delivering “round 31,000 to 33,000 items in March because the climate will get higher, and the market will get extra dynamic and vibrant.” It additionally added that the 20K a month goal (annualized 240K deliveries) is a “mid-term” goal however did not specify when that would occur.

Subsequently, NIO missed even the low finish of its preliminary steerage regardless of the corporate’s “confidence.” Consequently, I imagine the market has priced in a worsening outlook because the quarter ended, suggesting NIO may face important challenges ramping its manufacturing this yr.

China’s April deliveries outlook (based mostly on CPCA’s estimates) suggests a 37% YoY improve in retail NEV deliveries. Nonetheless, April deliveries are anticipated to stay flat MoM, at the same time as NEV penetration stays strong at 45%.

Nonetheless, it is fairly clear that China’s EV growth rate has slowed markedly “on account of a slowdown in shopper spending, attributed partly to a housing market disaster.” As well as, overcapacity in EV manufacturing has began to fret traders. Moreover, even Tesla (TSLA) felt the affect of a weak Q1. Accordingly, Tesla’s free cash flow fell into unfavorable territory because it intensified its investments in “synthetic intelligence infrastructure and experiencing an increase in unsold-vehicle stock.”

NIO traders are seemingly betting that Nio’s 2024 mannequin refresh may carry the gloom over its demand challenges. As well as, they might anticipate NIO’s mass-market fashions to assist the corporate obtain higher scale economies, as automakers are leaning into lower-priced fashions to enhance their attain. Nonetheless, we is not going to seemingly get readability on NIO’s skill to execute these methods till late 2024.

With NIO’s disappointing execution over the previous yr that continued in Q1, I imagine the market has downgraded NIO administration’s skill to ship efficient outcomes for 2024. To make issues worse for NIO, Xiaomi’s (OTCPK:XIACF) current entry into the EV scene has intensified aggressive headwinds for NIO. It is necessary to think about that Xiaomi is a free money stream worthwhile firm, bolstering Xiaomi’s EV market expansion. Analysts anticipate Xiaomi’s EV efforts to incur losses however do not anticipate Xiaomi’s FCF to show unfavorable, with Xiaomi’s FCF margins for 2024 and 2025 to achieve 4.5% and 5%, respectively.

However the valuation de-rating, NIO remains to be not valued at a reduction with a “C” valuation grade. Nonetheless, with an unenviable “F” profitability grade, I imagine NIO’s skill to scale profitably may show extremely detrimental. As well as, aggressive headwinds are anticipated to accentuate as automakers understand they could have been too optimistic of their near-term projections.

With NIO primarily depending on its home market to drive scale, NIO additionally faces focus dangers. Geopolitical headwinds in the EU and US will seemingly discourage NIO from increasing its penetration extra aggressively outdoors China past its present European cadence. Subsequently, NIO’s issues are anticipated to worsen and never enhance in 2024 as Tesla seems to be to regain its aggressive edge by doubtlessly launching lower-priced Tesla models as early as the tip of 2024.

NIO inventory’s worth motion demonstrates the market’s discontent with its execution. NIO has continued taking out decrease and decrease highs, as traders have been left baffled by NIO’s lack of ability to chart a transparent path towards worthwhile scale.

I assessed some promoting respite in April, displaying a chance that consumers may have returned to stem additional draw back. Nonetheless, it is also a short lived response attributed to short-covering after NIO’s quick curiosity surged to important highs lately.

Whereas I assessed {that a} near-term bullish imply reversion setup may present alternatives for short-term merchants, I imagine traders ought to proceed to keep away from NIO.

NIO administration must regain the belief of NIO traders to purchase into its progress thesis. Its lack of ability to ship its steerage persistently over the previous yr has unveiled the failings of its execution. Except NIO can display a transparent path towards 20K month-to-month deliveries with its foremost model, I imagine NIO’s valuation hasn’t totally discounted a worse consequence.

Score: Keep Maintain.

Necessary notice: Buyers are reminded to do their due diligence and never depend on the data supplied as monetary recommendation. Take into account this text as supplementing your required analysis. Please all the time apply impartial pondering. Notice that the ranking is just not supposed to time a particular entry/exit on the level of writing until in any other case specified.

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