NIO: Brace For Impact
NIO, Inc. (NIO) is getting hammered as delivery growth slows and there is a large rotation out of high-multiple growth stocks. In my opinion, NIO is still overvalued and continues to lose ground to its closest competitors in the Chinese electric-vehicle sector. As the risks mount, the stock could plummet even further.
NIO's Continued Fall Behind Competitors In January
With geopolitical tensions rising as a result of the Russia/Ukraine standoff, investors appear to have even more reason to sell growth stocks with inflated multiples. Recent fears of a full-scale Russian invasion of the European country add to previous months' concerns about supply-chain issues, inflation, and higher interest rates.
Furthermore, NIO, whose stock has seen a significant price increase in 2020 and 2021 as a result of the company scaling electric-vehicle production, is now facing increasing headwinds in terms of delivery growth.
In my previous article on the electric-vehicle maker, NIO Is Losing The EV Race, I discussed the risk of NIO ceding ground to its closest competitors in the electric-vehicle industry. NIO's competitors include Li Auto Inc. (LI), Xpeng Inc. (XPEV), Leapmotor, and HOZON Auto, which sells compact crossovers under the Neta brand.
Li Auto and Xpeng sell significantly more electric-vehicles than NIO, and HOZON Auto came dangerously close to overtaking NIO in December 2021 in terms of deliveries. In 2021, HOZON Auto delivered 69,674 new electric-vehicles, representing a 362% YoY increase. As a result, HOZON Auto became the fastest-growing company discussed here, easily outpacing NIO's 109.1% YoY growth rate.
I was particularly concerned about NIO's relegation to fifth place in terms of delivery growth, with nearly every other direct competitor producing delivery growth that exceeded NIO's. In December, NIO produced only 49.7% YoY delivery growth, indicating that NIO was indeed losing the EV race to more aggressively growing competitors.
Deliveries Of China
Deliveries Of China's Top 6 EV Startups (Gasgoo)
My concerns were confirmed this month, when NIO's January deliveries fell below 10,000 electric-vehicles once more, and delivery growth rates, to put it mildly, disappointed. NIO's deliveries of its various SUV models increased by only 33% YoY, resulting in one of the industry's slowest delivery growth rates.
Li Auto's deliveries increased 12% YoY, while Xpeng's deliveries increased 115% YoY. With deliveries slowing further in the first month of the New Year, there is a significant risk that competitors will outsell NIO in 2022. NIO delivered only 9,652 electric-vehicles in January, and the slow pace of sales/delivery could harm NIO's valuation.
NIO Deliveries In January
NIO Deliveries In January (NYSE:NIO)
With competitors gaining ground on NIO, the stock could be headed for another downturn. NIO's stock has already corrected significantly this year as a result of a large rotation out of high-multiple stocks, but slowing electric-vehicle delivery rates may not yet be priced into NIO's valuation.
More trouble could be in store for NIO and its investors if the market begins to view slowing delivery growth as an NIO-specific issue worthy of a valuation discount relative to other companies in the sector, especially if NIO loses market share to competitors. In this case, NIO's sales potential and market positioning may come under renewed scrutiny.
It doesn't help that the field of electric-vehicle companies is becoming increasingly crowded, with HOZON Auto and Leapmotor reportedly planning Hong Kong IPOs in 2022. New IPOs and increased electric-vehicle options for buyers present a profitability challenge for NIO and other industry players. NIO is not yet profitable, and investors may demand operating profits before assigning premium multiples in the future.
NIO's valuation has been significantly reduced in the last six months, but the stock remains overpriced. The sales multiple for NIO is under 7. Other EV manufacturers have higher P/S and P/B ratios, but they also produce more electric-vehicles and deliver them faster. Three of the six companies represented in this article's charts, HOZON Auto, Leapmotor, and WM Motor, are not yet publicly traded and thus do not publish financial information.
Given the significant slowing of delivery growth, I believe NIO's multiple is excessive. If NIO's delivery growth fails to meet high expectations in 2022, the multiple may contract even further.
NIO PS ratio
Data by YCharts
The Market Misjudges NIO's Risks
Concerns about a potential delisting of ADR shares have taken a back seat to other market concerns in recent months. Supply-chain issues, inflation, and now the conflict between Ukraine and Russia are consuming all of the media's attention. However, there is still a real possibility that Beijing will force Chinese companies to withdraw their ADR shares from foreign stock exchanges.
Despite the fact that other risk factors are currently receiving more attention, I believe the ADR delisting is real, and it alone may render NIO unsuitable as a long-term investment for U.S. investors.
If NIO's January delivery growth continues, the company will struggle to maintain its premium multiple in 2022. Growing deliveries by 33.6% YoY will not suffice in a market where direct competitors routinely deliver 100% YoY growth.
After Li Auto, Xpeng, HOZON Auto, and Leapmotor, NIO now ranks fifth in terms of delivery growth rates. The slower NIO's deliveries grow, the more difficult it will be for the company to demand a premium sales multiple in a sector that will only see increased competition and lower margins in the long run. For NIO, this means either upping the delivery game or bracing for a drop in valuation this year.