NIO (NYSE:NIO) scared off investors when it posted July deliveries that underwhelmed the markets. This sent the stock firmly below the $3.00, a level that could have found support. Instead, NIO stock price traded recently at $2.82.
Investors will have to wait for the next two weeks before either committing to the stock or dumping it at a loss. NIO is scheduled to report earnings before the market open on Aug. 27.
NIO Stock Fell After Weak July Deliveries
NIO reported that deliveries totaled 837 vehicles in July, consisting of 673 ES6s and 164 ES8s. As investors will recall, the ES6 is a 5-seater premium electric SUV. The ES8 is a 7-seater but also comes in a 6-seater variant.
Cumulative deliveries for both models reached 19,727. The company blamed a voluntary battery recall and deliveries pushed forward into June for the weaker numbers. China’s unfavorable macroeconomic and auto market conditions remained challenging for NIO. Needless to say, the U.S.-China trade conflict hurt sales. To top it off, NIO faced a declining trend: the drop in passenger vehicle sales on a year over year basis for 13 of the last 14 months.
NIO is optimistic that the ES8 battery recall will improve user confidence. With safety and quality assured, the brand will still have a strong reputation that resonates with its customer. NIO is free to turn its attention back to promoting stronger sales.
Now that the battery capacity allocation is back to normal, NIO will accelerate deliveries to make up for the delivery loss due to the recall. Management forecasts stronger August deliveries and aims to deliver between 2,000 and 2,500 vehicles.
Markets Ignore NIO’s Forecast
Markets failed to recognize NIO’s delivery number will triple from 837 vehicles in July to as many as 2,500 vehicles. At a share price below $3.00, NIO’s market cap is just one-tenth that of Tesla’s (NASDAQ:TSLA) market capitalization of $39 billion. So, when NIO is losing just as much as Tesla on an earnings per share basis, NIO stock looks like a stock worth speculating on.
Still, markets may see a lesser value in NIO than in Tesla because of its potential for profitability. In the last few quarters, NIO’s operating costs grew faster than its revenue. Tesla may see profitability through growing worldwide sales sooner than NIO does.
When NIO depends mostly on China for its revenue, investors also face geographic risks. The ongoing U.S.-China trade war sees no signs of ending. Persistent or rising tariffs levied against the country will hurt everyone involved. Since Chinese spending levels are sensitive to the country’s economic health, any decline will hurt NIO deliveries. After all, NIO’s EVs are premium products that are more expensive than conventional gas-powered automobiles.
Longer-Term Prospects for NIO
Investors speculating on NIO stock need to have the conviction that the long-term demand for its vehicles will continue growing. Assuming revenue growth outpacing operating cost growth in the years ahead, NIO will eventually reach profitability. Alternatively, investors who are unsure how the tariff and politics will play out may simply sit on the sidelines for now. In doing so, this group of investors will miss out on any big rally.
In sitting on the sidelines, investors just need to wait and see what happens to NIO stock after the quarterly earnings report. More recently, one Wall Street analyst from Merrill Lynch issued a “sell” call and a $3.00 price target of just $3.00 (per Tipranks). And short float is a lofty 22.4%. The Chinese EV supplier clearly has many bears betting against its prospects.
Ahead of the upcoming report, the average EPS estimate is a 27-cent loss on revenue of $176.28 million. In the last quarter posted on May 28, NIO reported a loss of 37 cents on revenue of $236.12 million.
Your Takeaway on NIO Stock
Investors have plenty of China-based stocks trading at sharp discounts. Although stocks like iQIYI (NASDAQ:IQ) and Baidu (NASDAQ:BIDU) are not in the EV space, they are examples of stocks trading at yearly lows. Investors could speculate on NIO and might get rewarded once the trade war ends.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
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