NIO: The Moment Of Truth

Summary

  • NIO will be reporting its Q2 results after market close 11 august 2021.
  • Its revenue for the period could reach a record high of $1.297 billion.
  • Investors should pay close attention to its management’s delivery guidance and their comments around the severity of component shortages.

All eyes will be on NIO when it reports its Q2 earnings report after market close tomorrow. The electric vehicle manufacturer has reported record deliveries for the period and its revenue is inevitably going to climb to new highs. However, its delivery growth has underperformed its peers in recent months which casts doubt on its near-term growth momentum, raises questions about the severity of its component shortages and suggests that its management may issue a rather soft guidance for Q3.

Delivery Momentum

I’ll start by saying that NIO’s total deliveries reached record levels in its Q2 – the quarter spanning from April to June. Its management had lowered their delivery guidance to 20,000 to 22,000 units, due to the ongoing semiconductor shortages, and the actual delivery number of 21,896 is towards the higher end of that guidance range. This suggests that the company experienced a good sales traction in Q2 and their execution is worthy of praise.


(Source: BusinessQuant.com)

Having said that, drilling down on this deliveries data on a monthly basis and then comparing it with other electric vehicle manufacturers reveals a concerning picture. NIO’s month-on-month delivery growth, although stellar on a standalone basis, has actually underperformed XPeng (XPEV) and Li Auto (LI) in four of the last five months. It’s unclear at this point in time if this is the beginning of an overall delivery slowdown for NIO or if it’s just a transitory speed bump.


(Source: BusinessQuant.com, company filings)

The automakers cater to different price points so it’s not necessarily indicative of market share losses. However, it presents the possibility that, perhaps, NIO is experiencing a more severe semiconductor component shortage of late. If that’s the case, then NIO’s expansion into Norway, which is due for September, could be delayed or maybe supply constrained. After all, these semiconductor shortages are still ongoing and they still continue to variably impact automakers across the globe (like here and here).

Next, we also need to consider the fact that NIO operates in the luxury EV (or electric vehicle) space whereas its mentioned peers are targeting the mid and low-end of the EV pricing spectrum. So, maybe, it’s just that the luxury EV segment in China grew at a slower pace, than the more affordable EV vehicle segments, in the recent months.

Lastly, the third possibility here is that, perhaps, NIO isn’t impacted by component shortages any differently from its peers and it’s just building an inventory buffer for its upcoming expansion into Norway. This would explain why its delivery growth was muted in the recent months and it would also alleviate shareholder concerns.

Whatever the case may be, we’ll just have to wait for management’s comments around the same on their upcoming earnings call to gain clarity on the situation. Investors should also monitor management’s delivery guidance for the next quarter as it would reveal the true extent of its supply chain issues and reveal how quickly the company can resume its growth momentum.

However, if there’s anything more than just the semiconductor shortage that’s weighing down on its sales – like production ramp issues, losing market appeal, logistics issues etc. – then it’ll be perceived negatively amongst market participants and it might even trigger a selloff in its shares.

Segment Financials

Moving on, NIO has two reportable segments, namely “vehicle sales” and “other sales”, out of which the former segment has accounted for the vast majority of the company’s total revenue ever since its IPO.

(Source: BusinessQuant.com)

Its vehicle sales segment, unsurprisingly, includes revenue from the sale of vehicles. The company delivered a record 21,896 vehicles during the quarter, up 9% sequentially and up 112% year over year. There haven’t been any reports of a drastic change in its average selling prices so we’ll just take the average from the past four quarters for our modelling purposes. This leads us to a projected revenue figure of RMB 7729 million in Q2, which is approximately $1.187 billion per the exchange rate at the time of this writing. This is a record high for the segment and it marks an increase of 4% and 122% sequentially and year-over-year, respectively.

NIO’s second reporting segment, namely other sales, accounted for just about 7% of the company’s total revenue in Q1 but it could soon become a key growth driver for the company. The segment includes the sale of energy packs (One Click for Power services and Power Swap services) and service pack (covering free repair service, routine maintenance service, enhanced data package, etc.) which form an ecosystem of products around NIO vehicles and differentiate it from other pureplay EV automakers. Not to mention, its innovative battery swapping subscription business may be small for the time being but it’s forecasted to boost NIO’s annual revenue by up to $0.75 billion by 2025.

As far as NIO’s Q2 results are concerned, I forecast its other sales segment to maintain its revenue growth momentum from the last quarter and once again grow by another 24% sequentially in Q2. This would bring the figure to RMB 712 million, equivalent to $110 million per the exchange rate at the time of this writing, and amount to roughly 8.5% of the company’s total revenue during the period.

Overall, I forecast NIO’s total revenue in Q2 to be $1.297 billion which would mark a sequential and a year-over-year growth of 6.5% and 146%, respectively. My estimate is actually in-line with the Street’s revenue estimates ranging from $1.25 billion to $1.32 billion, and the management’s revenue guidance range of $1.24 billion to $1.3 billion.

Final Thoughts

There’s no denying that NIO is a technology leader in its space. I’m actually bullish on the company due to its innovative battery subscription business, its cutting-edge vehicles, strong execution and its relatively discounted valuation. So, I believe that NIO is a buy on potential dips, for investors with a multi-year time horizon.

(Source: BusinessQuant.com)

Having said that, its relatively lower delivery growth in the recent months raises a few concerns. Investors should listen in on management’s comments around why their delivery growth is muted sequentially, how severely they are impacted by the component shortages, track their delivery guidance for Q3 and monitor their segment financials. These items would reveal NIO’s near-term growth prospects and could influence its stock price in the coming days and weeks. Good Luck!

Author: Business Quant, Seeking Alpha

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