Summary

• I believe NIO stock remains a solid speculative "Buy" for 2025 due to expected margin expansion, new model launches, and expanding market presence.

• The firm's Q3 results show increased deliveries and margins, driven by the ONVO L60 and efficient cost management.

• I believe NIO's ecosystem, including BaaS and power swap stations, enhances its market value and supports future growth.

• Despite risks like high capital needs and competition, NIO's valuation remains attractive, justifying a "Buy" rating for 2025.

Andy Feng

Intro & Thesis

I've been covering NIO Inc. (NYSE:NIO) stock for quite a long time here on Seeking Alpha. Since November 2022, I've been bearish, but then I changed my stance to "Neutral" at the beginning of December 2023 and then finally issued a "Buy" rating, noting that NIO was looking interesting as a speculative "Buy" (that call was made in early March 2024). The last time I updated my coverage was at the end of September 2024: I noted that the tide was finally beginning to turn in NIO's favor. Unfortunately for my bullish view, the stock continued to slide lower, proving me wrong (or too early):

Seeking Alpha, my coverage of NIO stock

Despite that underperformance, I believe nothing is over for NIO. I believe the latest corporate action taken by the management as well as the overall trajectory of the company's business operations make NIO a solid stock pick for the medium turn. I expect to see a rebound in NIO's stock price during 2025.

Latest Quarter Results Update

NIO completed 61,855 deliveries for Q3 FY2024, up 7% QoQ, even as total revenue dropped 2.1% YoY to RMB 18.7 billion (mostly driven by the lower average selling price (ASP) "due to product mix change, offset in part by the increased deliveries"). Car sales, at RMB 16.7 billion, dropped 4.1% sequentially but increased 6.5%, which was "a reflection of the rising role that NIO's new mass-market line - ONVO L60 - has played since it was introduced in late September", according to the management's commentary. As the management added, the ONVO brand should increase its production dramatically in the next few months, with monthly production reaching ~20,000 units per month already by March 2025:

Now we are ramping up our supply chain capacity. Near the monthly production capacity is expected to hit 10,000 units in December and 20,000 units by March.

Source: Q3 earnings call, the CEO

The CEO said on the call that there's very little overlap between NIO's brands with ONVO and that the latter only draws customers from brands such as Tesla's (TSLA) Model 3. He also drew attention to the L60's new technologies, which will take a while to roll out but will be very valuable once they are fully ramped.

NIO's increase in vehicle margin from 12.2% to 13.1% in the second quarter (compared to 11% in the first) was among the key third-quarter metrics, as far as I can see it. The company achieved this by incurring "lower material costs per unit as NIO continuously upgrades its supply chain and manufacturing processes." Likewise, NIO's gross margin for the quarter climbed to 10.75%, up from 9.7% Q2 and 8% Q3 FY2023, due to "efficient cost management and a strong set of high-margin products". On the other hand, if we overlay margin dynamics with the price of the stock for the last 3–5 years we will see that the correlation we were looking at no longer exists: the price of the stock started to disavow margin growth in early 2023, which looks kind of weird to me:

Data by YCharts

I don't think this discrepancy should last long if the margins continue to rise or just stabilize the way they are today.

NIO's success was not only in terms of volume and margin growth. They reported their "Other sales" ("parts, accessories, after-sales services, and power solutions") grew 19.2% YoY (+11.9% QoQ) to RMB 2 billion on the increased demand of NIO's ecosystem, including its new battery-as-a-service ((BaaS)) business and expanding power swap network (NIO has 2,737 power swap stations in the area, providing more than 58 million swaps during Q3). According to Market.us data, the BaaS market is estimated to reach ~$61.2 billion by FY2033, with a CAGR of 22.8% during the forecast period (2024-2033), so I think NIO's Power Up Counties project, in which the company brings charging and swapping infrastructure to less-served areas, will only serve to make the company's ecosystem more valuable over time.

The increase in R&D we saw recently should help NIO develop new vehicles, including the ET9 executive flagship sedan, slated for March 2025, and the Firefly sub-brand for the compact market. I'm really looking forward to the Firefly brand since I think it’s going to allow NIO to sell at more price points as well, broadening its revenue stream.

NIO launched a new brand last week, the low-cost Firefly brand. The new compact car from Firefly will cost as little as 148,800 yuan ($20,400) at launch. It also launched its most expensive model, the ET9, which starts at 788,000 yuan ($108,000), more than 5 times more! Clearly, NIO is trying to spread its wings into the high end of the market and the low end of the market in order to bring in more buyers, grow sales, and reach profitability. The company has a firm target to become profitable in 2026.

Source: cleantechinca.com

I should say here a few words on the government policies in China - including increased EV buying subsidies and charging infrastructure funding - which seem quite positive drivers for NIO's expansion. I believe these actions should help the whole country ramp up EV use, especially in lower-end cities and rural communities, where NIO's ONVO and Firefly lines have the most chance to expand market share.

During the Q3 earnings call, the CEO said they were expecting 72,000-75,000 in total delivery units for Q4. On January 1, 2025, we found out that NIO actually delivered 72,689 vehicles in Q4, bringing total deliveries for FY2024 to 221,970 (the cumulative deliveries reached 671,564 as of December 31, 2024). So the actual figure came a bit below the midpoint of the guidance (73,500), which might have disappointed some investors. But I think that the delivery number looks good as it captures 98.9% of the midpoint figure.

I can't say that I like everything about the company's balance sheet, but NIO is definitely not in such a bad position at the moment. Yes, the current ~$6 billion in short-term liquidity is still enough for less than 2 years of operating expenses, but the debt-to-equity ratio dropped in Q3, which isn't bad.

Data by YCharts

Most likely, as the business grows by scaling the production of new models, the company will resort to a combination of debt and equity, which may dilute the share of existing investors, but my impression is that the business will grow faster than the dilution rate. If this is the case, NIO's shareholders in general should theoretically build value over time.

NIO Stock Valuation Update

NIO is quite difficult to value using conventional valuation multiples, but if we focus on the cash-to-market cap ratio, we'll see that this metric, although it has fallen from 60%, is still quite high and amounts to 37.9% today:

Data by YCharts

There are some peers in China that are valued more cheaply - Li Auto (LI) and Geely (OTCPK:GELYF), for example - but they are focused on quite different niches (especially true for Geely). If we look at EV-only luxury-like brands like Zeekr, then we see an undervaluation of NIO stock given its plans to expand to other segments shortly, as well as the scale of its BaaS business segment.

Data by YCharts

Based on all of the above, I expect NIO stock should follow the company's margin expansion, which has been the case for years but stopped mattering two years ago. Expanding into lower-priced EV segments while cutting costs should help NIO generate the margins it needs going forward, driving the overall upside. Considering all this, the valuation still looks cheap, so I reiterate my "Buy" rating today. 2025 should be better for NIO than 2024, in my opinion.

Where Can I Be Wrong?

While NIO’s business may have had some success lately, I’m not here to say that it is an unfailing business. The company has seen its ASP be hit by products like the ONVO L60, which could lower overall margins moving forward. Also, NIO introducing new models and brands requires massive capital infusions and OPEX, which also puts some pressure on the bottom-line going forward. As mentioned on the earnings call, the company expects to achieve a 15% vehicle margin in Q4 FY2024 and 20% margin by FY2025 "based on scale efficiency and cost optimization", but keep in mind this is very lofty considering the current competition battle as it stands.

The undervaluation conclusions I've come up with today also carry significant risks. The company has no earnings and is expected to break even only by FY2027. This makes today's purchase of the stock quite risky.

Seeking Alpha, NIO

The Bottom Line

Despite the obvious risks to my thesis, I still believe that NIO is positioned quite favorably for 2025 - even better than last year. First, a number of new models are expected to hit the market, which should significantly expand the company's end market in China and abroad as early as the first half of 2025. Secondly, the swap station network that the company has today gives it an advantage over its competitors - if this network is further expanded, the margin should stabilize. As the margin stabilizes and increases on a consolidated basis - which is already happening - the stock price should eventually follow, in my view. Furthermore, the current valuation doesn't imply a significant premium over other peers in my opinion. For this reason, I rate NIO as a "Buy".

Thank you for reading!

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.