NIO Stock: What to Focus on in Its Path Towards Profitability

November 25, 2022

Consensus expectations are that electric vehicle (EV) maker NIO Inc. (NYSE: NIO) (SEHK: 9866) (SGX: NIO) will turn profitable by 2024.

But what should investors focus on to understand the growth trajectory of NIO?

After I conducted an interview with NIO’s head of Investor Relations (IR), Rui Chen, these are some of the indicators that I feel investors should focus on.

1. 100k vehicle deliveries by 2024

NIO has been ramping up its production.

In Q3 FY2022, vehicle deliveries jumped by 26.1% and 29.3% from Q2 FY2022 and Q3 FY2021, respectively.

Source: NIO Q3 FY2022 Financial Results, ProsperUs

NIO management has guided that deliveries of vehicles to be between 43,000 and 48,000 vehicles in Q4 FY2022, representing an increase of approximately 71.8% to 91.7% from the same quarter in FY2021.

This is a positive sign as it reflects management’s ability to navigate the challenges from China’s zero-COVID policy.

According to Rui Chen, management has taken various measures to ensure that the ramp-up in production remains on track despite supply chain disruption and uncertainty over China’s zero-COVID policy.

Among some of these measures include the increase in inventory level, especially on key raw material components, increase in frequency of shipments and logistics and a closed-loop system at the factories, which requires workers to stay on-site.

In 2023, investors can watch out for signs and progress of the ramp-up in production with about 20k vehicle deliveries per month during H1 FY2023 and 30k vehicle deliveries per month during the H2 FY2023.

2. Gross margin at around 20% or higher

Another indicator to look at is NIO’s gross margin.

Gross margin in Q3 FY2022 was 13.3%, compared with 20.3% in Q3 FY2021 and 13.0% in Q2 FY2022.

The decrease in gross margin as compared to the previous year was mainly attributed to the decreased revenue from sales of automotive regulatory credits with high sales margins, the decrease of vehicle margins, and the reduction in other sales margins, resulting from the expanded investment in its power and service network.

The increase of gross margin over the quarter was mainly attributed to the sales of automotive regulatory credits with high sales margins.

Investors should observe and see if the gross margin could improve going forward to at, or around, 20% or higher.

Source: NIO Q3 FY2022 Financial Results, ProsperUs

3. R&D expenditure should peak at around current level

Research & development (R&D) expenses in Q3 FY2022 were RMB 2.9 billion (US$556 million), representing an increase of 146.8% and 37.0% from a year ago and the prior quarter, respectively.

The R&D expenditure should peak at around its current level per quarter.

The expansion into new markets is also carried out in an effective way by leveraging third-party players.

NIO is leading the premium EV segment in China

NIO has an advantage in the EV market in China.

Currently, NIO commands about 70% of the premium segment (the “Premium” segment refers to vehicles with a price of RMB 300k and above).

Given its leadership position in the premium EV market in China, NIO will be the first to gain market share from premium, conventional diesel-run vehicles such as BMW, Mercedes Benz and others.

In China, the government has continued to support the EV sector and NIO is optimistic that EVs will command 50% of the market share by 2025.

The innovative technology swap and diversified product line-up of NIO will continue to drive sales for NIO and help the China EV player to achieve profitability by 2024.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.

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