Stocks to sell

Although I’m a car enthusiast, I’m not in love with Nio (NYSE:NIO) stock. In fact, I’ve repeatedly suggested that investors avoid it in the past.

Source: xiaorui /

In 2020 I wrote the article “Nio Stock Has Skyrocketed in 2020, But High Risks Remain” using the Nasdaq Dozen method to analyze the company, I focused on key metrics such as revenue, earnings-per-share, return-on-equity, earnings surprises and PEG ratio.

My suggestion then was that “[t]aking into account the profitability, which is negative, the negative free cash flows, and the very large increase of debt in 2019, NIO stock is a very speculative bet for 2020 and beyond. And with all fundamental factors suggesting it is extremely overvalued, a lot of caution is suggested.”

In late June 2021, I included NIO in the article “Don’t Touch These 3 Overpriced EV Stocks With a 10-Foot Pole.” There, I argued that “NIO stock does not have a P/E ratio as the company is posting losses. MorningStar lists its 2020 book value per share at 80 cents. The company’s operating and net margins were negative for the past three years … Also, there is an increasing number of shares outstanding, which means investors are facing negative stock dilution … NIO stock is too pricey.”

For the record, I also considered other Chinese EV stocks XPeng (NYSE:XPEV) and Li Auto (NASDAQ:LI) to be overvalued with this write-up.

So with all of that background in mind, has anything changed for NIO stock today?

NIO Stock Declines Due to General Market Selloff and Company News

Recently NIO stock has tumbled.

There are two key reasons behind this. First, there has been news about increased geopolitical risks due to the fact Taliban are now in control of Afghanistan. More broadly, this harms stocks and risky assets.

Second, negative news about China has also added salt to the wound. Specifically, reports indicate that “[r]etail sales and industrial production each slowed more than expected in … [China] in July, suggesting a more marked growth deceleration in the second half of the year as the country tries to contain fallout from the latest resurgence in coronavirus cases.”

On top of that, news of a deadly crash caused by self-driving technology is adding selling pressure to NIO. Any problems or risks to its autonomous driving technology could muddy-up its stock performance in 2021.

Why NIO Is at an Inflection Point Now

NIO reported its Q2 2021 earnings report, and it was a solid one. The highlights from this report showed that:

  • “Deliveries of vehicles were 21,896 in the second quarter of 2021, including 4,433 ES8s, 9,935 ES6s and 7,528 EC6s, representing an increase of 111.9% from the second quarter of 2020 and an increase of 9.2% from the first quarter of 2021.
  • Vehicle sales were RMB7,911.8 million (US$1,225.4 million) in the second quarter of 2021, representing an increase of 127.0% from the second quarter of 2020 and an increase of 6.8% from the first quarter of 2021.
  • Total revenues were RMB8,448.0 million (US$1,308.4 million) in the second quarter of 2021, representing an increase of 127.2% from the second quarter of 2020 and an increase of 5.8% from the first quarter of 2021.
  • Gross margin was 18.6%, compared with 8.4% in the second quarter of 2020 and 19.5% in the first quarter of 2021.”

A great increase in deliveries, revenues and gross margin shows radical improvement. But when it comes to what matters most for creating value, such as net profit and positive and strong free cash flows, NIO has a long way to get there.

In support of NIO stock, some indicate that the net loss reported decreased compared to Q2 2020. That’s true. But from a fundamental and valuation perspective, NIO is far from a bargain or a stock with great value.

I like the fact that NIO had strong second-quarter results and issued positive guidance both for strong deliveries and revenue growth. But it is still losing money, has raised cash to fund its strategic goals and expansion and a possible slowdown in the economic growth of China are serious factors.

All of these issues add up, and I’m still less than thrilled about NIO stock now.

Competition In EV Industry Intensifies

NIO is facing intense competition, from other domestic EV markers, but also from well established automakers. For example, some of its key competitors include Volkswagen (OTCMKTS:VWAGY), Toyota Motor (NYSE:TM), BMW (OTCMKTS:BMWYY) and Tesla (NASDAQ:TSLA).

So, if it cannot make money selling its models now, I have concerns about how it will be able to make a profit when tons of other EV options exist. Don’t forget — many more will appear soon.

5-year Trend in Profitability Is Worrisome

NIO wants to be a key player in the EV market. It has ambitious goals and several models that may help in this direction. But if you do a quick analysis of the company’s performance over the past 5 years using MorningStar, there’s no reason for excitement — at all.

The operating margin was -28.3% in 2020s compared to -141.6% in 2019. Net margin in 2020 was -34.51% compared to -145.86% in 2019. What about the value created for its shareholders? In 2020 return on equity was -53.77%. Finally, return on assets in 2020 was -16.21%. All of this shows that weakness and inefficiency is still strong and present.

Valuation: Too Pricey

At the end of my breakdown here, I’m just going to refer to only one valuation metric: book value per share. MorningStar reports a book value per share (TTM) of $2.48. With the current stock price of NIO at $39, this implies a 15.72x ratio, which certainly makes NIO stock too expensive.

In conclusion, I do see why some are have hope for NIO — there’s some room for optimism based on revenue growth and strong deliveries. But it’s still too weak in profitability. The company is losing money, and it does not create value for its shareholders. The coming months and years will be pivotal for NIO.

Ultimately, I do not get excited about its valuation and fundamentals now. I cannot get pumped for a company that cannot make a profit on surging sales. After all, any slump in revenue could only make things worse.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.