Nio Inc (NYSE: NIO) stock has fallen alongside other Chinese EV makers this week as investors appear to have lost confidence in the sector. While NIO stock has declined by more than 10% since Monday morning, fellow manufacturers like Li Auto (NASDAQ: LI) and Xpeng Inc (NYSE: XPEV) have also dropped by more than 10%.
Despite this fear, is NIO stock a good investment?
What is Nio Inc?
NIO Inc designs develops, manufactures and sells smart electric vehicles in China. It offers five, six and seven-seater electric SUVs, as well as smart electric sedans.
The company is also involved in the provision of energy and service packages to its users, as well as design and technology development activities. These include the manufacturing of e-powertrains, battery packs and components.
In addition, it offers power solutions, a battery swapping service, a fast-charging solution, a mobile charging service through charging vans, an application that provides access to a network of public chargers and their real-time information and a valet service.
Further, the company provides repair, maintenance, and bodywork services through its NIO service centers and authorized third-party service centers; statutory and third-party liability insurance, and vehicle damage insurance through third-party insurers; courtesy vehicle services; roadside assistance; data packages; and auto financing and financial leasing services.
Additionally, it offers NIO Certified, a used vehicle inspection, evaluation, acquisition, and sales service.
The company was formerly known as NextEV and changed its name to Nio in July 2017. The business was incorporated in 2014 and is headquartered in Shanghai, China.
How Does Nio Inc Make Money?
The vast majority of the company's revenue is derived from vehicle sales. For example, its most recent earnings update showed that 93% of total revenues from the three months ended 30 June came from vehicle sales.
However, other revenues, derived from auto financing services, sales of service, energy packages and sales of used cars, increased the size of their small contribution by 35% during the period.
NIO Stock Financials
The company's most recent quarter saw it rack up total revenues of $1.5bn, representing an increase of 21.8% from the second quarter of 2021. Vehicle sales climbed by 21% to $1.4bn and other sales climbed by 35%.
The period also saw cost of sales increase by 30% to $1.3bn due to higher delivery volumes and higher material costs. As such, gross profits declined by 15% to $200.1m. Similar hikes to R&D spending, as well as selling, general and administrative expenses, resulted in Nio's net loss deepening by 370% to $411.7m.
At the end of the period, the company had cash and cash equivalents of $3.7bn.
NIO stock has a price-to-sales ratio of 4.80 and a price-to-book value of 6.18. These compare with respective averages of 14.82 and 32.69 among auto and truck manufacturers, according to CSIMarket. This could indicate that NIO stock is undervalued.
Currently, NIO stock sits at a price of $14.77. This represents a decline of more than 55% across the year to date and a drop of around 59% across the last 12 months. The stock has a 12-month high of $44.27 and a low of $11.67.
The company does not distribute a dividend to its shareholders.
NIO Growth Potential
Nio delivered 25,059 vehicles in the second quarter of 2022, which is more than 14% growth from the same period a year prior. This growth is expected to accelerate, with the company's operations in the period having been seriously hampered by COVID-19 outbreaks.
The business' most recent financial results saw Steven Wei Feng, CFO of Nio, comment:
"With the ET7 setting sail to Europe in August, users in more countries will experience our new products and services later this year.
"To meet the growing EV demand of the global market, we have been working closely with our partners to ramp up the production and deliveries of our new products. We also expect to further expand our market share in the global premium smart electric vehicle market with high operating efficiency."
The company aims to sell its EVs in 25 countries by 2025, and its expansion beyond Chinese borders could deliver serious growth as the business has already established itself as a competent manufacturer of reliable vehicles.
NIO Investment Risks
The company has already faced severe disruption to its operations due to COVID-19 outbreaks in China. Given the country's continued aggressive 'no COVID' policy, it's worth bearing in mind that the business could face further disruption from future outbreaks and surges.
Additionally, it is worth noting that there is fierce competition in the EV space. As well as international businesses like Tesla (NASDAQ: TSLA), General Motors (NYSE: GM) and Ford (NYSE: F) pushing into the Chinese EV space, homegrown businesses like BYD, SGMW and Chery each have significant shares of the domestic market.
Additionally, risk surrounds Chinese stocks on US indexes due to the threat of delisting. In a row over the auditing of Chinese companies listed in the US, The China Securities Regulatory Commission and US Public Company Accounting Oversight Board did manage to sign an agreement in late August.
The two parties agreed on the process for inspecting companies' audit papers after months of concern was kicked off by US regulators accusing Chinese companies failing to adhere with American rules.
Goldman Sachs analysts commented in late August that the market appeared to be "pricing in around 50% probability" that Chinese companies could be delisted from the US.
Is NIO Stock a Good Investment?
While Nio Inc seems like an exciting investment prospect on the basis of its rapidly growing car sales, there are factors that complicate the picture.
Primary among these is the impact that continued inflation will have on costs for the business, which are already rising faster than revenues. Additionally, the high level of inflation and increasing interest rates make NIO stock unattractive for investors at present, meaning any significant increase in share price is unlikely in the short term.
That all being said, Nio is a rapidly growing EV manufacturer with a huge footprint in Asia and ambitious expansion plans. The business could be one of the big winners of the green revolution.
Of 34 analysts covering the stock listed by the Wall Street Journal, 27 rated the stock as a Buy. The analysts offered a consensus price target of $29.32 per share, compared with the current price of $14.77.