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The electric vehicle (EV) industry hasn’t lived up to the hype of its early days, and of late has been in the news for much more unpleasant reasons, like bankruptcies. NIO (NIO) is one name that once looked quite promising, and was touted as the “Tesla of China.” At its peak in early 2021, NIO commanded a market cap of over $100 billion.
Cut to 2024, and NIO has a market cap of just around $6.87 billion. The stock is down 57.3% YTD, after having previously closed in the red in each of the previous three years. Notably, NIO has otherwise stood out in a crowded Chinese EV industry, and billionaire investment manager Baillie Gifford was among the early backers.
However, amid the stock’s perennial underperformance, even Gifford dumped the majority of its stake in Q1. Abu Dhabi-based CYVN Holdings has also backed NIO, and poured nearly $3 billion into the company. However, the cash-rich fund has also incurred massive losses on its investment, as NIO is trading not very far from its 52-week lows.
In a nutshell, NIO hasn’t been able to live up to the hype - even as the stock remains quite popular among U.S. retail investors, and it often tops the charts on daily trading volumes. What’s the forecast for NIO stock, and can this underperforming Chinese EV stock recover in 2025? We’ll discuss in this article.
NIO’s Deliveries Have Risen in 2024
NIO’s deliveries rose almost 44% YoY in the first seven months of the year. While the increase came from a lower base, it nonetheless looks encouraging considering the slowdown in China, where NIO sells most of its cars.
NIO has yet to report its Q2 earnings, but its Q1 earnings were a dampener, as losses widened to $718.1 million. The company’s gross margin also plunged to 4.9% as compared to 7.5% in the previous quarter. NIO blamed the lower margins on changes in its product mix and lower average selling prices, led by high promotional activity.
Notably, NIO – which once ruled out participating in the EV price war – has also had to cut prices to spur sales. While it expects vehicle margins to rise to double digits in Q2, and further in Q3 and Q4, management was quite circumspect about the pricing environment.
Reacting to an analyst question on whether the company would continue sales promotions to increase volumes, CFO Stanley Qu said during the Q1 call, that NIO will be “considering the intensifying market competition, we will also be more flexible on sales policy to make sure our market position is secure.”
In the meantime, NIO has a strong balance sheet, and held $6.3 billion as cash and cash equivalents at the end of March. Having a strong balance sheet is immensely important for startup EV companies, given their perennial cash burn.
NIO Stock Forecast
Wall Street analysts are generally unimpressed when it comes to NIO, as 9 of the 13 analysts covering the stock rate it as a “Hold” or some equivalent. NIO’s mean target price is $6.53 which is more than 63% higher than Tuesday’s closing prices. The stock’s Street-low target price of $4 is roughly in line with current prices, while the Street-high target price of $13 would imply the stock's value more than tripling from here.
NIO’s Price Action Has Disappointed Bulls
NIO’s price action has been disappointing for bulls, including me. The company has failed to move to the next level with its deliveries, even as Li Auto (LI) has raced ahead, and its July deliveries surpassed the combined total deliveries of NIO and Xpeng Motors (XPEV).
NIO’s gross margins have also whipsawed between low single digits to high teens. Notably, NIO’s gross margins were negative in early 2020, but rose to double digits by the next year. Markets also rewarded it for the improvement – which, coupled with the euphoria towards EV stocks, lifted its stock price to all-time highs in early 2021.
Can NIO Stock Recover in 2025?
For NIO stock to recover from these levels, the company has to increase its deliveries significantly while cutting down on its losses. The two objectives are linked, as higher shipments will lead to better absorption of fixed costs, which leads to higher margins.
That’s easier said than done, though, as EV companies are struggling to strike a balance between volumes and margins. While cutting vehicle prices can spur shipments, it takes a toll on margins – something that even EV market leader Tesla (TSLA) is witnessing. The other alternative isn't feasible, as not participating in the EV price war might lead to lower deliveries, and by extension, lower margins anyway.
It's Going to Be a Bumpy Road for Chinese EV Companies
The prospects of China exporting its EV overcapacity are getting bleaker by the day, with Canada joining the ranks of other Western countries in imposing massive tariffs on Chinese EVs. This would mean that competition in the Chinese EV market might only worsen as exports get further squeezed.
NIO is coming up with its new budget brand ONVO, and says its first product, L60, will be a direct competitor to Tesla's Model Y - which, for context, was the best-selling model globally last year. Next up is the launch of even cheaper vehicles under the Firefly brand, where NIO will offer compact vehicles in the price range of RMB 100,000 to RMB 200,000 (between $14,026-$28,052). However, other players are also working on budget models, and Xpeng Motors recently revealed a budget car priced below $17,000.
NIO trades at a next 12-months (NTM) price-to-sales multiple of only 0.74x, which would appear quite low. However, the honeymoon period for startup EV companies is over, and they now need to prove that they can compete in the brutal pricing environment – especially in China.
The macro environment for Chinese EV companies isn't looking too rosy, at least in the short term. However, I wouldn’t give up on NIO stock yet, given its attractive product proposition, strong brand, and loads of cash on its balance sheet. It's still not over for NIO, and the stock still has a fair chance of recovering in 2025 if the management can deliver the goods.
On the date of publication, Mohit Oberoi had a position in: NIO , XPEV , LI , TSLA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
