Is NIO Stock a Ticking Time Bomb? Examining the Bear Case.

Stocks to sell

Chinese EV maker Nio (NYSE: NIO) is certainly a top option for investors looking for exposure to the high-growth Chinese EV market. The company’s top models are highly popular in China, and the company has seen strong market share gains in the battery EV space in recent years.

With more than $7 billion in revenue over the past year, the company expects to grow at a 20%+ clip in future years. Indeed, this growth should support higher stock prices over time.

The company’s deliveries are up more than 50% year-over-year, and from a narrative perspective, this is certainly among the EV stocks seeing significant growth bulls may certainly focus on.

That said, the company is posting significant losses, with last year’s total bottom line EPS number coming in at -$1.70 per share.

With a stock price that’s now below $5 per share, this is a company that certainly provides a high-risk, high-potential option for investors to consider. The question is whether this decline is likely to continue, or if this stock is worth holding or buying here.

Let’s dive in.

Nio Gets Approval of 3rd Factory in China

Nio recently secured approval for a third factory in China, with a potential production capacity of 1 million cars per year. This factor could rival Tesla’s (NASDAQ: TSLA) Shanghai gigafactory facility.

Tesla’s plant can produce 1.1 million vehicles yearly, making it the largest globally. Thus, this regulatory approval for Nio’s facility marks a significant milestone for the company, despite some ongoing overcapacity concerns.

The EV company also started construction of its third plant, F3, without disclosing the commencement of mass production. Located in Huainan city, Anhui province, F3 will focus on manufacturing vehicles for Nio’s budget-friendly brand, Onvo.

Nio confirmed that construction has already begun on its third plant, with the company aiming for an initial 100,000-unit capacity. The expansion addresses rising demand for Nio and Onvo vehicles, with potential for future growth. 

Strong Rival to Tesla

Recently, William Li, Nio’s current CEO, shared his intentions in competing with Tesla’s Model Y units and Toyota’s RAV4. Deliveries and orders continue for the L60, and its expected to start its deliveries on September.

Nio’s CEO, William Li, unveiled the vehicle in Shanghai, expressing intentions to compete with Tesla’s Model Y and Toyota’s RAV4. Orders for the L60 have begun, with deliveries set for September. Nio plans to introduce a new Onvo model annually to expand into the family car market and global markets.

Despite these obstacles, Nio is currently confronted with 100% tariffs in the U.S. and an EU investigation into Chinese EV imports for alleged subsidies. Global electric car manufacturers grapple with declining sales and heightened competition. 

Tesla started layoffs of over 10% of its EV workforce in April, while reporting a profit decline of over 50% in Q1. Similarly, China’s BYD (OTCMKTS: BYDDF) experienced profit drops due to reduced demand and market price conflicts.

The NIO Bear Case

Nio is emphasizing EV battery-swapping tech this year, evident in its reported partnerships. Nio’s collaborations showcase strategic alliances, but success isn’t guaranteed because of high costs and alternative fast-charging methods. Developing battery-swap technology involves substantial R&D expenses.

President Joe Biden also raised tariffs on Chinese EVs from 25% to 100%. This has made it harder for Nio to plan out their strategies for the North American market. Nio’s CEO criticized the move as “unreasonable,” but it’s unlikely to prompt policy changes. Similar tariffs from the EU may further hinder Nio’s expansion plans.

Be Cautious With NIO Stock

As investors are always hyped for EV manufacturers like Nio because of its potential, its stock has been failing to deliver the numbers.

Despite its strong start to the year, NIO stock has seen a double-digit decline this year, which appears to have momentum to the downside. With gross margins deteriorating and geopolitical challenges mounting, the picture is murky for this company, to say the least.

In 2023, the company lost over $2,000 per unit delivered compared to 2022’s numbers. Monthly deliveries were still below projected numbers despite a great record in May. However, based on these projections, Nio could still incur losses, akin to Tesla’s early years.

Moreover, high debt and profitability concerns suggest a risky investment with uncertain returns. This makes NIO stock a risky bet in my view.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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