When Nio Inc. (NASDAQ: NIO) reported first-quarter unit sales that exceeded its prior delivery targets last month on May 29, shares closed at $3.61 that day. Nio stock finally bottomed at around $2.38 by mid-June and is appearing to benefit from the stock market rebound. What are the odds that the Chinese electric vehicle supplier sustains the stock uptrend and rewards shareholders?
Nio Reports Strong First-Quarter Unit Sales
Nio delivered 3,989 ES8s, its high-performance premium electric SUV, in the first quarter. Previously, the company forecast a delivery target of between 3,500 and 3,800. It delivered 16,461 units for the year-to-date period ended April 30.
While investors appreciated the strong performance despite seasonal headwinds led by the Chinese New Year holiday slowdown, business worsened afterward. Nio now expects a sequential decline in deliveries for the second quarter. It cited ongoing U.S.-China trade war concerns and a sluggish Chinese auto market.
EV subsidy cuts are bigger than Nio previously expected. The 40% drop in subsidies, from RMB 67,500 (US $9,850) to RMB 40,500 (US $5,900) will hurt sales. Starting June 26, subsidies will fall further to just RMB 11,520. In effect, the subsidy is no longer a positive catalyst for Nio unit sales.
The availability of the sportier, less expensive ES6 sedan will hurt ES8 SUV sales. As expected, Nio will align its operating cost structure to the lower demand. In Q1, it already cut R&D spend by 28.8% sequentially. SG&A spend fell 32.2% sequentially. The cuts are necessary and should slow the quarterly operating losses.
Still, the shrinking operations also signal that the company will not grow as fast as investors previously thought. Nio shares are already down 34% in the last month. The 51% drop in the quarter is exaggerated. In that period, the stock spiked to the $10 – $13.80 level after getting positive but meaningless coverage from 60 minutes.
Nio cut its headcount by 4.5% in Q1 and now has 9,390 employees globally, down from 9,834 at the end of 2018.
Future Expectations and Nio Stock
Nio has over 12,000 ES6 pre-orders. It added 5,000 from its exposure at the Shanghai Auto Show. But with business slowing, Nio will also right-size its service networks. It plans to shift its focus to smaller Pop-up Houses. This should lower operating expenses while keeping its sales and marketing coverage unchanged.
Its 125 NIO battery swap stations throughout the country are not likely to change. And the 500 Nio Power Mobile on the road should give current and future customers enough support.
Nio showcased its next-generation ET7, a high-performance premium electric sedan at the Shanghai Auto Show. Built on NP2 (Nio platform 2.0), the EV will have Level 4 autonomous driving capabilities. The company did not offer any timeline for ET7. Given the current slowdown for selling existing models, it is in no hurry to bring the new model to market.
Headwinds for Nio Stock
Although unit sales improved in the first quarter, Nio still reported a negative gross margin of 13.4%. Total revenue fell 52.5% from last year to $243.1 million. Year-over-year SG&A and R&D expenses rose 71.5% and 55.4%, respectively, adding to the $390.9 million loss in the first quarter.
Nio cannot accurately predict how many ES6 units it will sell for the full-year 2019. Investors must watch the demand levels for ES6 at launch first. If it reports strong sales momentum, Nio will be in a better position to forecast sales for the year.
The company set a high priority for expanding its sales channels. By offering more test drives to the public, Nio might sustain better selling volume. Conversely, cutting marketing spending at a critical period of its growth could hurt its long-term prospects.
Your Takeaway on Nio Stock
Nio shares rose slightly in the last week but could fall again if market optimism fades. Much of the near-term upside depends on the U.S. and China resuming trade talks.
Predicting how the talks will progress is impossible. Investors might do better speculating on trade talks by holding bigger names like Alibaba Group (NYSE: BABA). Still, Nio has a flashy product and could potentially grow market share in China in the long-term.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.