The Silver Lining for Nio Investors

When observing the global electric vehicle (EV) industry currently, depending on your angle, some investors would conclude there's a China problem. Chinese EV makers have been heavily subsidized by the government, which has given domestic automakers a significant advantage on developing EV technology and infrastructure, and at lower costs. It has forced the U.S. and Europe to impose significant tariffs on Chinese EV imports to help protect their own industries.

That said, glancing at Nio's (NYSE: NIO) third-quarter results, it looks like even Chinese automakers have a China problem; the competition and price war have clobbered some results. Let's look at Nio's mixed numbers and a big silver lining they contain.

Is the momentum gone?

Nio, one of the major Chinese EV makers, has posted strong sales since April, but the momentum slowed slightly in October. That's a red flag considering the Chinese passenger vehicle market posted 11.2% growth compared to the prior year.

Data source: Nio press releases. Chart source: Author.

Nio topping 20,000 vehicle deliveries each of the past six months helped secure its premium position in China. CEO William Bin Li said, "Nio brand has firmly secured the top position in China's [battery EV] market for vehicles priced over RMB 300,000 [$41,400], holding more than a 40% market share in the first three quarters of this year."

Nio delivered 61,855 vehicles during the third quarter, a 12% jump from the prior year, but with the ongoing price war in China, vehicle revenue dropped roughly 4% compared to the prior year. The aggressive discounting in the EV industry has hit many automakers on both the top and bottom lines, and Nio is no exception.

Nio reported a third-quarter adjusted loss per share of $0.31 on sales of $2.7 billion, compared to Wall Street estimates of a loss of $0.20 per share on sales of $2.7 billion, per FactSet. But there was a silver lining in Nio's third quarter.

The silver lining

When looking at Nio's third quarter, investors might assume that with the ongoing competition in China combined with declining revenue, Nio's margins would have been punished. But that wasn't the case.

In fact, Nio's gross margin increased to 10.7% in the third quarter, better than the prior year's 8%. Vehicle margins increased to 13.1% from 11% over the same time frame. Management was able to drive these results amid a decline in revenue because of its ongoing cost controls and lower material pricing.

The fact that Nio's margins moved higher during the current market environment is a great sign. The company is becoming leaner and will benefit as the price war eventually cools. That said (and it is certainly a silver lining to see margins increase), Nio still lags behind rivals XPeng (NYSE: XPEV) and Li Auto (NASDAQ: LI), which posted gross margins of 15.3% and 21.5%, respectively, during the third quarter.

What it all means

Nio's third quarter might have disappointed investors with the slight decline in revenue and widening net loss, but with the current price war in China, this was to be expected. And Nio's uptick in gross margins and vehicle margins was a pleasant surprise.

Management expects vehicle deliveries to rebound to between 72,000 and 75,000 units in the fourth quarter, a 44% to 50% gain over the prior year, and it forecasts revenue to jump 15% to 19%.

Investors would be wise to focus on the company's production ramp up of its more affordable Onvo brand, as well as its upcoming Firefly brand, which will be unveiled at Nio Day in late December and will target a much larger customer base. These brands should be able to help the company reinvigorate sales, but investors will have to watch how margins respond amid the price war and introduction of more affordable vehicles.

Investors would also be wise to remember that Nio is a speculative stock. It has shed 48% of its value year to date, and should remain a smaller position in any portfolio. That said, despite the stock's decline in 2024, Nio is in better shape today than it was years ago and has a pipeline of new electric vehicles on the way.

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems. The Motley Fool has a disclosure policy.