Summary

• NIO remains unprofitable despite increased deliveries and new models, burning significant cash and relying on external financing, leading to shareholder dilution.

• The ongoing EV price war and geopolitical challenges hinder NIO's ability to improve its bottom-line performance and profitability.

• Macro risks, including China's economic conditions and potential trade tensions, further limit NIO's growth prospects and market performance.

• While short-term growth opportunities exist, NIO's weak fundamentals and reliance on external capital make it an unattractive long-term investment.

Victor Golmer/iStock Editorial via Getty Images

Despite the explosive growth of the Chinese EV industry, NIO (NYSE:NIO) is still unable to r each the breakeven point. Although the company has experienced a rise in deliveries in 2024 and released new models, it continues to burn cash at a significant rate and relies on constant outside financing to prop up its liquidity. This leads to the constant dilution of its common investors as its share count has aggressively increased in the last year. The ongoing price war within the EV business along with the rising geopolitical challenges are unlikely to change the situation for the better for NIO.

While the company’s stock has some upside potential, that potential has little to do with the company’s internal developments. It has more to do with the macro environment, which also can change overnight and no longer guarantee the upside. That is why I still believe that NIO’s stock is a HOLD at best. This is because its fundamentals are relatively weak right now, but the improved macro situation could still change the market sentiment for the better in the short term.

Liquidity Comes At A Price

Ever since I published my latest article on NIO in October, where I highlighted various challenges that the company is facing, its stock has declined by around 15% and underperformed against the S&P 500 index.

Since that time, NIO has also reported its Q3 earnings results, which showed a 2.1% Y/Y decline in revenues to $2.66 billion. What’s worse is that the earnings report along with the other developments that happened in recent months also indicated that the company has no way of becoming profitable anytime soon and its upside will likely remain limited.

One of the reasons why NIO is underperforming is because it can’t improve its bottom-line performance and become profitable due to the ongoing price war that is happening inside the electric vehicles industry.

In November, the industry was starting to prepare for the intensification of the price war this year as the biggest EV maker BYD (OTCPK:BYDDF) requested its supplier to decrease its prices by 10%. Then earlier this month, the EV sales data in China for 2024 came out and showed an impressive double-digit growth in sales last year. However, despite the rise in sales within the industry, only a handful of EV makers are currently profitable, and NIO is not one of them. As the price war is expected to intensify, it’s hard to see NIO improving its bottom-line performance anytime soon.

If we look at the company’s latest income statements, we will see that NIO has reported great operating and net losses in recent years. The latest expectation on the street is that NIO could become profitable only a few years from now, but that timeline could be further extended if the price war intensifies.

At the same time, if we look at NIO’s quarterly balance sheets, we will see that its cash reserves are decreasing for a few quarters in a row, then there is a bump in liquidity in one or two particular quarters in a row, after which there’s once again a decline in cash reserves and the cycle is repeating all the time. This is happening because NIO greatly relies on outside financing to compensate for the constant losses and avoid a liquidity crisis.

The biggest issue with this is that it comes at the cost of its common shareholders. In Q3, NIO had 2.06 billion fully diluted outstanding shares, up from 1.74 billion shares a year ago, which implies a ~18% annual dilution rate. Considering NIO’s weak bottom-line performance in recent quarters, it’s safe to say that the company will continue to burn cash and rely on outside financing, which will continue to dilute its common shareholders, to keep its operations intact and avoid a liquidity crisis.

Macro Risks Are Rising

The rising macro issues could also negatively affect NIO’s performance in the foreseeable future. In addition to the ongoing price war, China is currently experiencing deflation, while its consumer confidence stays around historically low levels at a time when industrial profits are declining. This could have a negative impact on NIO’s domestic sales in the future.

At the same time, if the Trump administration escalates the ongoing Sino-American trade war by imposing additional tariffs on Chinese goods, then it could also negatively affect China’s export-led economy and have an indirect impact on NIO as well.

NIO’s ability to grow its presence in Europe is likely going to be limited as well. In October, the European Commission imposed additional tariffs on EVs made in China, while NIO itself sold only 431 vehicles in the European Union in Q4.

All of this shows that NIO doesn’t have a lot of room to grow outside of China and with the Chinese market experiencing a price war that has no end in sight, the company’s upside could be limited going forward.

The Upside Is Limited

In addition to all of those issues, NIO is also an unattractive investment based solely on the fundamentals. While in most of my articles, I present a discounted cash flow model to figure out the fair value of the targeted company, doing such a model for NIO doesn’t make a lot of sense at this point. Since the company is unlikely to generate any earnings in the following years, its EBIT will remain negative for a while, and the model will be showing a negative free cash flow for the following years. This would make it impossible to figure out NIO’s fair value using the DCF method. NIO has already been reporting a negative FCF in the last few years, and things aren’t expected to change for the better anytime soon.

The comparable method won’t yield any significant results as well, since most of NIO’s valuation metrics are negative due to its inability to generate profits. At best, we can compare NIO’s margins and returns on assets against its peers from the EV industry, so that at the very least we can figure out how well it fares against others.

The table below paints a bleak picture of the EV industry, where only a handful of businesses is able to generate solid returns due to the rising competition and the heated price war. What’s worse is that NIO’s margins and return on assets are worse in comparison to the industry’s median, which indicates that it’s performing worse than its peers and it will continue to burn cash and raise additional liquidity at the expense of its common shareholders to stay in business. As such, it’s safe to say that fundamentally NIO is an unattractive investment right now.

NIO's Comparable Table (Data: Seeking Alpha, the table was created by the author)

Some Growth Opportunities To Consider

While NIO is unlikely to greatly improve its bottom-line performance anytime soon, there are still several growth opportunities that can help its stock to appreciate in the short to near term.

Despite a Y/Y decline in revenues in Q3, NIO ended the year on a high note as its deliveries accelerated in Q4. Once the Q4 earnings report comes out a month from now, the company might report a better-than-expected top-line performance, to which the market might positively react. The release of new vehicles in 2025 could also give a boost to NIO’s sales and might result in the appreciation of its shares.

The further implementation of the stimulus program by Beijing in 2025 could also help improve consumer confidence in China and revive the economy. NIO’s shares might positively react to such a development, since they already greatly appreciated in September when a new stimulus package was only announced.

The Bottom Line

Aside from the release of new models, which can boost sales but not improve the bottom-line performance significantly, NIO has a few internal catalysts that can make its stock attractive to investors. Its fundamentals are relatively weak right now, and the improved macro situation is the only thing in my opinion that could still change the market sentiment for the better in the short term.

Other than that, there are no reasons to be optimistic about the company’s long-term future. NIO will more than likely continue to burn cash and rely on outside capital to finance its operations. This would almost certainly result in the constant dilution of its shareholders, as was the case in recent years.