In a year, Nio's (NIO 7.81%) stock price has fallen more than 50%. Investors are concerned about Nio's slower growth due mainly to supply chain challenges, as well as the resurgence of COVID-19 cases in China. More importantly, competition in the Chinese EV market is heating up, with big players as well as newer entrants having their eyes on the massive opportunity. Then there is the short seller's report accusing Nio of overstating its revenue.
Can Nio thrive in such a scenario?
The EV stock has fallen steeply
If you just look at the fall in Nio's stock price, you get a feeling that something might be terribly wrong with the company. However, if you look at Nio's revenue growth, figuring out why the stock has fallen so dramatically could be a head-scratcher.
As the chart shows, Nio's revenue has been growing, albeit at a far slower pace, in recent quarters. The stock, which was trading at a high valuation due to its rapid growth, saw a steeper correction than its slower growth warranted.
Let's take a closer look at Nio's growth over the years. In 2019, Nio produced 20,565 electric vehicles. It more than doubled its production to 43,728 units in 2020. Likewise, the company again more than doubled its production to 91,429 units in 2021. Nio's pace of growth, however, slowed in 2022.
In the first half of 2022, Nio delivered 50,827 units. Now, the company expects the second half to be better, with June already better than April or May. So, for the year, it is expected to grow deliveries, though they may not double from 2021.
NYSE: NIO
Key Data Points
Attractive product lineup
Nio began deliveries of its new luxury sedan, ET7, in March. In June, it launched ES7, a five-seat electric SUV. Nio expects its deliveries to begin in August. The new products should drive Nio's sales growth.
However, the company's key challenge is supply chain constraints, and it is making every effort to secure a smooth supply. It expects to ramp up deliveries significantly in the second half of the year.
Does the stock's fall make sense?
Slower growth in deliveries has hurt Nio stock. The key question is, are concerns relating to Nio overblown, and is the stock better valued now?
NIO PS Ratio (Forward) data by YCharts
Even after the fall, Nio stock is trading at a forward price-to-sales (P/S) ratio of 3.7, which clearly doesn't looks cheap. However, if we compare Nio's ratio with its peers, the stock looks attractive. As the chart shows, Nio stock's forward P/S ratio is the lowest among its peers. Nio's ratio is also much lower than its own historical average.
EV stocks have been commanding premium valuations based on their expected growth and long runway for growth. If Nio continues to double its deliveries every year, as it did in the past, it won't take long for its P/S ratio to fall to far more reasonable levels.
Nio looks well-placed to grow
Nio has set up an independent committee to investigate the recent short seller's allegations. If the allegations are found false, Nio stock's fall may reverse. The company is launching new models, working on resolving supply chain challenges, and its efforts seem to be working, as evidenced by the strong delivery numbers in June.
Nio is also expanding in the European market and looks well-placed to capture a growing piece of the EV pie. The Chinese government plans to extend subsidies for electric vehicles, which should continue to support EV growth in the country.
Overall, Nio could be a far more established, and profitable, company five years from now. The stock's fall this year presents a buying opportunity.
