Nio stock: Why It's Better To Avoid in 2025

$NIO Inc (NIO.US)$ $Tesla (TSLA.US)$ $BYD COMPANY (01211.HK)$ $XPeng (XPEV.US)$

The article highlighted 4 reasons why you should avoid Nio stock:

1) Outperformance Fizzled Out

NIO's outperformance has fizzled out as the market sent its investors back to reality on its unprofitable business.

However, the company's optimism about its updated product cycle and lower-priced segments has failed to follow through. Accordingly, NIO's revised guidance for Q4 revenue is below Wall Street's consensus, heightening potential pricing headwinds that are expected to carry forward to Q4.

2) Ability To Reach Breakeven may end in disappointment

Management has committed to reaching breakeven profitability by 2026. However, its execution in its new growth segments is pivotal.

However, it's also predicated on NIO's capabilities to continue to lift its production scale, which is pivotal to improving its operating leverage. Given the scaling challenges the company faced in its core business over the past year, investors will likely scrutinize its ability to ramp production and deliveries in its lower-priced segments. However, given the execution risks as NIO navigates entering more competitively priced businesses, revenue expectations must be calibrated for potentially higher volatility to account for unanticipated disappointment.

3) Profitability not sustainable
NIO reportedly has a 48% market share in its core premium segment. Yet, it has not been sufficient to reach sustainable profitability.

Notwithstanding NIO's optimism and conviction, the lack of profitability, despite reportedly owning a market share of 48% in the premium segment (BEVs priced above RMB300K), is somewhat disappointing. Hence, I assess that NIO has likely faced challenges in scaling up its opportunities in its core market segment, behooving a segue to target lower-priced models.

4) Valuation Depends On Its Execution
While it has demonstrated more robust vehicle margins recently, it remains to be seen whether it could be sustained.

Wall Street's revisions to NIO's estimates are mixed, highlighting the uncertainties surrounding the changes in its product mix as it continues its production ramp...Moreover, the execution risks inherent in its product mix adjustments and more aggressive forward outlook could intensify the need to post more robust performances in Q4.

My Take:

• About a year ago, I shared an article about avoiding Nio stock in 2024. Read here:
Nio stock: Avoid in 2024

After comparing with this article, I see Nio profitability has not changed much - still producing cars at a loss.

• The increase in the Q3 sales YoY implied that the company is spending more money at an unsustainable way on the cash burning projects e.g. the battery swapping station (BS).

• The management continues to deny it must cut cost and improve productivity. Instead the CEO paints a rosy picture with unrealistic sales forecast.

• Its plan to expand export was hit by higher tariffs imposed by the EU. The US is slapping higher tariffs on Mexico and Canada to prevent Chinese EV (like Nio and BYD) from entering the market through joint venture business with the US car makers.

• The sales figures of the 2 new models -Firefly and Onvo in the next 2 quarters will tell if the company can survive. Given the management style, the CEO will not admit failure. He may raise funds by selling more convertible bonds and increase the stakes of sovereign investment firm, CYVN Holding which will result in diluting the stock value.

• There are valid reasons why the stock is given a "Hold" rating and to avoid the stock. The S&P500 index is moving in a bullish trend partly due to the recent US Fed rate cut but Nio share price is still -45.5% YTD.