Andy Feng
Elevator Pitch
My investment rating for NIO Inc.’s (NYSE:NYSE:NIO) stock is a Hold.
I previously wrote about NIO in a June 13, 2022, update touching on the company’s Q1 2022 results and May 2022 vehicle delivery metrics. This current article shines the spotlight on NIO’s most recent quarterly earnings and its post-results outlook.
NIO isn’t a Buy after recently announced earnings, although it is expected to achieve faster top line growth and narrower losses for Q3 2022 and Q4 2022. Recent developments in terms of semiconductor chip restrictions for NVIDIA Corporation (NVDA) are indicative of the geopolitical risks that NIO faces, and this might possibly affect the company’s long-term development plans for autonomous driving. As such, NIO stays as a Hold-rated stock, instead of a Buy.
What Were NIO’s Expected Earnings?
NIO’s expected normalized net loss per share for the second quarter of 2022 was -RMB1.25, as per the sell-side’s consensus financial forecasts obtained from S&P Capital IQ.
In other words, the market had earlier anticipated that NIO will go from achieving positive non-GAAP adjusted earnings per share of +RMB0.21 for Q2 2021 and +RMB0.79 for Q1 2022 to generating losses in Q2 2022. This wasn’t a surprise, as I have highlighted in my prior mid-June 2022 article that NIO’s vehicle gross profit margin should decline in the second quarter of this year due to an increase in battery costs.
Did NIO Beat Earnings?
NIO failed to beat market expectations with its Q2 2022 financial results announced in the previous week on September 7, 2022 before trading hours.
The company’s actual second-quarter non-GAAP adjusted net loss turned out to be -RMB1.34, which was below the market’s consensus bottom line estimate of -RMB1.25 as indicated in the preceding section of this article.
Vehicle gross margin for NIO decreased by -3.6 percentage points YoY and -1.4 percentage points QoQ to 16.7% in the most recent quarter. This was a key factor contributing to NIO’s losses for Q2 2022.
But NIO’s actual net loss was much wider than what the analysts had expected because of higher than expected operating costs. The company’s operating expenses jumped by +79% YoY from RMB2,337 million for Q2 2021 to RMB4,186 million in Q2 2022. In QoQ terms, NIO’s operating costs rose by +15% in absolute terms. The company’s operating expenses-to-revenue ratio also expanded by +400 basis points on a QoQ basis to 40.7% for Q2 2022.
NIO mentioned at its Q2 2022 earnings briefing on September 7, 2022 that the surge in operating costs was attributable to the “increase in marketing and promotion” relating to the “launch of ES7 (new vehicle model)” and “the increased personnel costs in research and development” driven by the development of “new products and technologies.”
I will further the discussion on the key metrics relating to NIO’s most recent quarterly financial performance in the subsequent section.
NIO Stock Key Metrics
There are both positives and negatives associated with NIO’s Q2 2022 results if one analyzes specific key metrics for the recent quarter.
On one hand, it was encouraging to see NIO’s average selling price or ASP increase by +6% QoQ to approximately RMB382,000 based on my calculations.
In my June 13, 2022 article for NIO, I noted that the company will introduce three new vehicle models, namely the ET7, ET5 and ES7 this year, and the new model launches have boosted its ASP. Specifically, the new ET7, which boasts higher selling prices as compared to the older models, accounted for as much as 27% of NIO’s second-quarter sales volume.
On the other hand, NIO highlighted at its recent quarterly investor call that the company’s “battery cost per unit has gone up in Q2 2022 without providing specific numbers. The company noted that this was the main reason for the decline in its vehicle gross margin for the second quarter of the current year, which I had pointed out in the prior section.
More importantly, it is a disappointment that NIO also guided at the company’s Q2 2022 results briefing that there is “great uncertainty and challenges regarding the battery cost” and noted that this will “have a negative impact to our (vehicle) gross margin” in the near term.
What To Expect After Earnings
The expectations for NIO after its Q2 earnings is that the company should deliver a better set of results for the latter half of this year.
According to S&P Capital IQ’s consensus financial data, NIO’s YoY revenue expansion in RMB terms is projected to accelerate from 21.8% for the second quarter of 2022 to +32.2% and +120.2% for the third and fourth quarters of 2022, respectively. Analysts also estimate that NIO’s net loss per share will narrow from -RMB1.34 in Q2 2022 to -RMB1.21 for Q3 2022 and -RMB0.61 for Q4 2022.
The market’s consensus financial projection for NIO is consistent with what the company is guiding for. NIO’s management guidance points to 31.0%-38.7% YoY growth in top line for the third quarter of 2022. The company also left its 150,000 vehicle deliveries goal for 2022 unchanged, which is equivalent to an expected +64% growth rate for the full year.
The incremental sales volume contribution by the new vehicle model launches, ET7, ET5 and ES7, is the key driver of accelerated revenue growth for NIO in 2H 2022. The increase in sales generated from the new models which carry higher ASPs also has a positive impact on NIO’s profitability, which explains the expectations of narrower losses for the company in Q3 2022 and Q4 2022.
Is NIO A Good Investment Long-Term?
NIO’s autonomous driving technology is a key pillar of the long-term investment thesis for the stock.
The company refers to its autonomous driving technology as “NIO Autonomous Driving or NAD” which is comprised of “perception algorithms, localization, control strategy, and platform software developed in-house” as highlighted on its corporate website. Notably, the ET7, which I mentioned was a key driver for the company’s ASP increase for Q2 2022 earlier, is the first electric vehicle for NIO to be launched in the market with NAD. This is an indication of how important NAD is for NIO as it relates to the company’s long-term growth prospects.
But new restrictions introduced by the US government could potentially affect NIO’s long-term plans in the area of autonomous driving technology. On August 31, 2022, Seeking Alpha News reported that “the U.S. has imposed a new license requirement for any future export to China” with respect to NVIDIA Corporation’s “A100 and forthcoming H100 integrated circuits.”
NIO addressed this issue at its Q2 2022 earnings call, highlighting that its “computing power is sufficient for our autonomous driving technology in the aspect of the AI training for now”, and it also stressed that “there are also many AI-training chipset type companies in China who are working on the mass production of their chipset.”
Nevertheless, there is significant uncertainty in relation to geopolitical tensions between the US and China, and it is difficult to determine if Chinese suppliers will be able to replace NVDA as the supplier of chips (of similar quality) to NIO in the future. In the worst case scenario, this latest development could push back the timeline for the development and advancement of autonomous driving technologies for NIO and its Chinese electric vehicle peers. Therefore, I don’t have sufficient confidence to label NIO as a good long-term investment.
Is NIO Stock A Buy, Sell, Or Hold?
NIO’s stock is a Hold. I have a positive view of the expected improvement in the company’s financial performance for 2H 2022, but I am worried about long-term risks relating to the company’s progress in the area of autonomous driving technology.
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