Should you buy NIO stock? What to Consider Ahead of Q1 Results

The Chinese manufacturer of electric vehicles (EV) NIO Inc. (NIO – Free Report) is expected to release its first quarter 2024 results on June 6 before the opening bell. Investors are wondering if this could be an opportune time to invest in the stock, given the sell-off seen so far this year. NIO shares have plunged more than 41% year to date, significantly underperforming the sector.

The price drop reflects broader challenges in the electric vehicle market, including tepid demand and infrastructure issues. From an all-time high of more than $60 per share in early 2021, the stock now hovers around $5 per share. Of course, the high prices of 2020 and 2021 were largely due to the electric mobility frenzy that had stretched the valuations of almost every electric vehicle startup.

But after witnessing such a steep drop in its stock price, does the company now appear fairly valued and present a good buying opportunity? Additionally, as NIO lines up to reveal its first quarter results, what should investors watch for in its report?

Key NIO Indicators to Watch

A crucial aspect that investors already know is the number of deliveries. The company delivered 30,053 vehicles in the first quarter of 2024, a 3.2% year-over-year decline, which is expected to impact revenue. The Zacks Consensus Estimate for sales is $1.48 billion, suggesting a year-over-year decline of about 5% and a significant decline from the $2.4 billion generated in the fourth quarter of 2023.

Another key metric to watch is vehicle margin. During the last reported quarter, the indicator stood at 11.9%, an improvement of 90 basis points sequentially and 510 basis points year-on-year. With management’s optimistic forecast of a 15-18% margin for the year, investors will be on the lookout for signs of sustained improvement.

That being said, the company needs to further reduce its manufacturing costs as well as operational expenses as it is experiencing substantial operating losses. In the fourth quarter of 2024, operating losses jumped 37% year-over-year, although they decreased 1.6% sequentially. Maintaining consistent improvement in operating margin is crucial to NIO’s journey to profitability.

The Zacks Consensus Estimate for first-quarter 2024 loss per share is pegged at 31 cents, indicating an improvement from last year’s reported loss of 42 cents.

Are there enough growth drivers for NIO?

China’s strong push for electric vehicle adoption is giving NIO a boost. Despite a general slowdown in demand for electric vehicles, NIO operates in a market where demand is holding up better than in the United States. NIO’s strong position with the Chinese government is an advantage. Additionally, a robust product portfolio, including models such as ES6, ET5T, ES8, EC6, EL7, ET5, ET7 and EC7, bodes well for the company.

Although deliveries in the first quarter of 2024 were poor, the last two months showed significant improvement. Last month, NIO delivered a record 20,544 vehicles, a year-over-year increase of 233.8%. This brings total deliveries in 2024 to 66,217 vehicles so far, a 51% year-over-year increase.

NIO’s battery swapping technology, part of its Battery-as-a-Service (BaaS) strategy, sets it apart from its competitors. The company has installed 2,419 power plants around the world and aims to build 1,000 more in 2024. Expanding partnerships with major Chinese automotive groups strengthens this ecosystem.

NIO’s financial situation improved following a $2.2 billion investment from Abu Dhabi’s CYVN Holdings in December. The investment strengthened NIO’s balance sheet, enabling intensified brand positioning, enhanced sales and service capabilities and significant investments in core technologies.

The recent launch of the low-cost Onvo model, the L60, priced around RMB 250,000 ($34,600), could boost sales, although the impact on manufacturing costs remains to be seen. Additionally, NIO’s acquisition of two JAC factories is expected to reduce production costs, thereby improving efficiency and competitiveness.

Should you buy NIO stock now?

Well, NIO remains unprofitable and requires continued capital injections, which poses a risk of dilution. There is a risk that any recovery in its shares will be quickly offset by new capital issues.

Additionally, there is intense competition in China with many companies and models entering the market, forcing players to lower prices. In this competitive market, NIO will have to work harder to attract buyers’ attention, and lower prices could further reduce its margins.

It is discouraging to see that loss per share expectations have widened for the current fiscal year and next.

From a valuation perspective, NIO’s price-to-sales (P/S) ratio is well below all-time highs. Both of these high valuations were never justified by the company’s fundamentals. NIO is currently trading at a forward sales multiple of 0.78, still above industry levels. The stock also doesn’t look very attractive at current levels. It carries a value score of F.

We believe investors should be cautious and avoid rushing to buy on declines. Before considering an investment in NIO, it is crucial to wait for the first quarter results for clearer signals. Investors should pay close attention to whether NIO continues to improve its automotive margin and how its new models are selling. Additionally, savings from acquiring its manufacturing partner’s assets should be closely monitored.

NIO currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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