Summary

• NIO remains fundamentally weak with persistent unprofitability, deteriorating net income, and a shrinking cash position, leading to a Strong Sell rating.

• Intensifying competition from legacy automakers, Tesla, and other Chinese EV brands further undermines NIO's market position and growth prospects.

• Intrinsic value analysis suggests NIO is overvalued by around 24%, with a calculated intrinsic value per share of $3.36.

• Potential positive catalysts like the NIO MENA joint venture and Mastercard partnership are unlikely to offset the company's significant fundamental issues.

NIO"s store with electric car inside

My thesis

Despite the October share price spike, NIO (NYSE:NIO) currently trades 11% lower than it did when I shared my previous bearish call. NIO remains fundamentally weak, and I am still very pessimistic about the company's prospects. The competition continues intensifying fiercely, which is never a good development for a weakly positioned company like NIO. Moreover, my valuation analysis suggests that NIO is far from being called attractively valued. Due to all these unfavorable factors, I reiterate a Strong Sell rating on NIO.

NIO stock analysis

NIO is fundamentally weak, which can be seen from some large warning trends. The company's financial performance continues to be a major concern for investors. Despite having sold hundreds of thousands of vehicles and being in operation for several years, the company remains deeply unprofitable.

The Q3 net income has deteriorated YoY by around $100 million despite revenue delivered modest growth. This persistent and growing loss indicates a fundamental issue with the company's business model, as it has failed to achieve operational efficiency or economies of scale despite its market presence.

Data by YCharts

As a result, NIO's cash position is melting down. The company started this year with $7 billion in cash. By the end of Q3, NIO's cash position had decreased to $5.3 billion. This continuous cash burn not only undermines the company's financial flexibility, but also raises concerns about its ability to fund future operations and growth initiatives without resorting to further dilution of shareholder value through equity issuances or taking on additional debt.

Data by YCharts

Another big warning sign is rapidly intensifying competition. The company faces fierce competition from established luxury automakers such as Mercedes-Benz, BMW, Audi, and Volkswagen, all of which are aggressively expanding their electric vehicle offerings. These legacy brands bring with them strong brand recognition and established distribution networks. These crucial factors make it difficult for NIO to carve out a substantial market share in the premium segment.

Data by YCharts

Furthermore, NIO must contend with Tesla, the global leader in electric vehicles, which has a strong presence in China and continues to innovate and expand its product line. NIO's R&D budget is several times lower compared to Tesla, which is a significant fundamental flaw for a company operating in a highly innovative industry like EV. In addition, NIO's financial position cannot be compared to Tesla's fortress balance sheet. Tesla's brand power, technological advancements, and economies of scale present a formidable obstacle for NIO's growth aspirations.

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The emergence of other Chinese luxury EV brands, such as ZEEKR (55% YoY deliveries growth in Q3 2024) and Xpeng (16% YoY deliveries growth in Q3 2024). NIO struggles to compete with these two companies as its Q3 deliveries grew much slower at around 11% YoY. Local rivals are vying for the same customer base and are often able to offer comparable products at competitive prices, which erodes NIO's market share and pricing power.

NIO's attempt to diversify its product portfolio with the introduction of its lower-end brand, ONVO, is unlikely to provide significant relief from competitive pressures. The mass-market EV segment is already crowded with established players like BYD (OTCPK:BYDDF) and numerous other budget Chinese brands. Moreover, Tesla's plans to launch a sub-$30,000 model in 2025 will likely add even more competition in this space.

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Due to NIO's weak fundamentals, its stock experiences weak momentum. Deep operating losses together with fierce competition looks like a very unfavorable combination, which explains the market's cautious stance on NIO.

Intrinsic value calculation

It is always difficult to value a deeply unprofitable company like NIO, but I will try it using the discounted cash flow (DCF) approach. I usually figure out the discount rate by myself, and for NIO it is the weighted-average cost of capital (WACC). NIO's WACC is 9.59% and the logic behind is outlined in the below working.

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The year 1 revenue assumption is $9.44 billion and revenue CAGR for years beyond is 7.02%. Since my outlook is bearish, I have to balance out my bearishness in the DCF model with the aggressive perpetual growth rate, which I estimate at 4% due to solid secular trends in EV industry. Moreover, my aggressive DCF assumptions are supported by incorporating a yearly 100-bps FCF margin expansion.

As a result, the intrinsic value per share is $3.36. The current share price is $4.42, meaning that the stock is overvalued by around 24%.The notable

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The notable overvaluation assertion is also supported by NIO's sky-high Price/Book ratios, substantially higher compared to the sector median.

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What can go wrong with my thesis?

Even with all these problems on NIO’s plate, there are a few positive catalysts that may offset some of the bearish pressure. But you have to keep in mind that all of this is not likely to fully offset the fundamental issues plaguing the company.

A notable potential positive catalyst is NIO's joint venture with CYVN Holdings to form NIO MENA, targeting the Middle East and North Africa market. This growth might open new revenue growth drivers for NIO and open up new markets. As a proposed new EV research, production and future product launch in the area could result in economies of scale and efficiency, they plan to cooperate on a new EV project. But the success of this project is hardly guaranteed, as the EV market is competitive worldwide and launching into new markets requires big investments.

Another potential positive development is NIO's strategic partnership with Mastercard. The partnership will offer users globally value-added services and may allow NIO to expand into international markets. The agreement can bring new in-car payments and privileges to Mastercard cardholders, which will add value to NIO’s offering and loyalty. But the financial effects of this partnership have not been announced and might not be strong enough to relieve NIO of its profitability woes immediately.

Summary

NIO remains a Strong Sell for me. Significant fundamental flaws like rapid cash burn together with weak positioning against the competition cannot be ignored alongside stock overvaluation.