Nio Inc – ADR (NYSE: NIO) hit the ground running in the market this morning after the company announced vehicle deliveries that came in ahead of expectations for the first quarter. The positive news led to the stock closing 3.45% in the green.
While the news released today was positive, it doesn’t necessarilly mean that an investment in the company at current levels would be a good idea. Let’s dig in and see if now is the time to buy NIO.
Starting With The NIO ES8 Vehicle Delivery Report
In the press release issued early this morning, Nio said that it delivered 3,989 ES8 Sports-Utility Vehicles (SUVs) in the first quarter of 2019. That proved to excite investors as the company’s own guidance said that it would deliver somewhere between 3,500 and 3,800 vehicles in the quarter.
However, the beat expectations on a quarterly basis alone is great, but it’s important to dive a little deeper. Here are the monthly sales experienced in the quarter:
- January – 1,805 ES8s delivered.
- February – 811 ES8s delivered.
- March – 1,373 ES8s delivered.
Looking at these numbers, we’re seeing anything but consistent growth. So, what’s the deal there?
Issues With Growth In ES8 Vehicle Sales
In the report, NIO said that the Chinese New Year holidate related to closures of automobile license plate registration offices. As a result, the holiday impacted sales in February. However, that doesn’t explain why March sales were nearly 24% lower than what we saw in January. However, there’s a good explination for that.
China recently announced a reduction in government funded subsdidies to those that purchase electric vehicles. This is actually the reason for the lackluster expectations for the 2019 year that were announced with the company’s fourth quarter earnings report.
With that in mind, it can be argued that Nio’s strong sales in January weren’t the result of organic growth, but the result of consumers trying to get in on the subsdidies before they disappear. As the fact that these subsdidies are dieing off hits, lower vehicle deliveries can be expected.
The Lowered Expectations Have Already Been Priced Into The Market
The good news for NIO investors is that the lowered expectations as the result of reducing subsdidies have already been priced in the market. Let’s not forget the drastic declines that we saw on the stock earlier this month after the company reported its financial results for the fourth quarter, missing expectations and setting the stage for more upset ahead with poor guidance.
With the large recent declines in mind, the stock may be undervalued. Nonetheless, everything has to align right for that to be the case.
What HAS TO HAPPEN For NIO To Be A Good Buy
At the moment, a few factors have to fall into place for Nio to continue on a trend of meaningful gains in the long run:
- ES8 Sales – Let’s say that the Chinese New Year didn’t lead to the drastic declines in sales in February. Instead, let’s say that it’s China’s stance on subsdidies that cuased the change. While the news hit hard, the company did see compelling growth in vehicle deliveries in March. If this trend continues, it’s a good sign that the stock will continue upward in the long run.
- Losses Must Reverse – In the company’s fourth quarter earnings report, we saw losses increase by 41% quarter over quarter. Moving forward, NIO is going to need to focus on cost cutting and value creation. The company only has enough cash and cash equivalents on hand to get through another three months at best. Slowing the bleeding could help the company avoid the need for further funding.
- Investors Need To Remain Patient – Building this thing up to its potential isn’t going to be an easy task for the management team at NIO. As we saw with Tesla, there are plenty of challenges in the electric vehicle space. For the company to be a long term success, it is likely going to need further support from the investing community. So, investors will need to be willing to stick it in there to the end for this to be a strong long-run play.
My opinion here is simple. While there are signs that suggest that NIO may be undervalued at the moment, the risks are too great to jump in. With declining subsdidies, the pricing of Nio’s vehicles won’t be as competitive to other options. This will likely turn off some buyers.
Nonetheless, there is also a strong argument on the bullish side of the coin. While I urge you to consider the risks, it’s worth mentioning that vehicle deliveries did see a strong increase from February to March. Should this continue, the stock could see strong gains. Nonetheless, a move like that would be largely based in speculation, and would come with increased risk.
All in all, the decision is yours, but if it were my money, it wouldn’t be in NIO at the moment.
What Do You Think?
Where do you think NIO is headed moving forward? Join the discussion in the comments below!