Jiading, China-based EV manufacturer NIO Inc. (NIO) produces  five-, six- and seven-seater electric SUVs and smart electric cars. The company has made solid progress on the operational front over the past months by deploying Power Swap stations 2.0 and  in beginning construction of its new plant in Xinqiao Industrial Park in Hefei.

However, due to the negative investor sentiment fostered by the Chinese government's crackdown on ride-hailing app provider Didi Global Inc., NIO's stock has declined 38.5% in price year-to-date. Closing yesterday's trading session at $30, the stock is currently trading 55.2% lower than its 52-week high of $66.99.

In addition, the company's shares have declined 24.4% over the past month since the U.S. Securities and Exchange Commission increased its scrutiny of foreign stocks. So, as the company struggles to meet its production levels amid current supply chain constraints, investors remain concerned over its prospects.

Click here to checkout our Electric Vehicle Industry Report 

Here is what could influence NIO's performance in the upcoming months:

Volatile Environment for US-listed Chinese Companies

This month, the Securities and Exchange Commission (SEC) adopted amendments to finalize regulations implementing the Holding Foreign Companies Accountable Act (HFCAA). The statute allows the SEC to bar companies from trading and delist them from exchanges if the Public Company Accounting Oversight Board (PCAOB) fails to audit requested reports from these companies for three years in a row.

Unlike many other nations, China has refused to allow the SEC's accounting body, PCAOB, to scrutinize its audits on national security grounds. So, regulators in the United States are concerned that the lack of regulatory oversight is putting investors at risk, and hence the SEC may begin delisting Chinese shares. Such a move might drag down the price performance of many Chinese companies, including NIO.

Increasing Competition

Along with Tesla Inc. (TSLA), the current market leader, numerous traditional automobile companies, including Toyota Motors (TM) and Volkswagen AG (VWAGY), are also aggressively investing in electric vehicles (EVs). On December 14, Toyota announced that between 2022 - 2030, it will invest $35 billion to build a full line of 30 battery-powered EVs. In addition, XPeng, an EV manufacturer in China, is looking to start deliveries of its G9 SUV, which is fitted with an advanced supercharger, by the second half of 2022. Amid the current global semiconductor chip shortage, this could weigh heavily on NIO's revenue growth and price performance.

Inadequate Financials

While NIO's total revenue increased 116.6% year-over-year to RMB 9.81 billion ($1.52 billion) for the third quarter, ended September 30, 2021, the company's loss from operations grew 4.9% from its year-ago value to RMB 991.93 million ($153.94 million). Its net loss came in at RMB 835.30 million ($129.64 million), while its loss per share grew 85.7% from the prior-year quarter to RMB 1.82 ($0.28). In addition, its cash and cash equivalents declined 43.8% for the nine months ended September 30, 2021, to RMB 21.59 billion ($3.35 billion)

Poor Profitability

NIO's 19.1% trailing-12-months gross profit margin  is 46.9% lower than the 35.9% industry average. Also, its ROC, net income margin, and ROA are negative 5.3%, 30.1%, and 14.3%, respectively. Furthermore, its 0.64% trailing-12-months asset turnover ratio is 39.5% lower than the 21.9% industry average.

Stretched Valuations

In terms of forward Price/Book, the stock is currently trading at 11.65x, which is 239.3% higher than the 3.43x industry average. Also, its forward EV/Sales multiple of 7.88x is 459% higher than the 1.41x industry average. Furthermore,  NIO's 8.46x forward Price/Sales is 626.7% higher than the 1.16x industry average.

POWR Ratings Reflect Uncertainty

NIO has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NIO has an F grade for Stability and a D for Value and Quality. The stock's 2.46 beta  is consistent with the Stability grade. In addition, the company's poor financials and lofty valuations are in sync with the Value and Quality grades.

Of the 67 stocks in the F-rated Auto & Vehicle Manufacturers industry, NIO is ranked #54.

Beyond what I have stated above, you can view NIO ratings for Growth, Momentum, and Sentiment here.

Click here to check out our Automotive Industry Report 

Bottom Line

NIO's stock has dipped 38.5% in price so far this year. A volatile macro environment as the U.S. tightens its regulatory requirement on foreign companies, and rising competition in the EV space amid a global  semiconductor chip shortage could cause the EV maker's shares to retreat further. Thus, we believe the stock is best avoided for now.

How Does NIO Inc. (NIO) Stack Up Against its Peers?

While NIO has an overall D rating, one might want to consider its industry peers, Daimler AG (DDAIF), Isuzu Motors Limited (ISUZY), and Suzuki Motor Corporation (SZKMY), having an overall B (Buy) rating.

Click here to checkout our Electric Vehicle Industry Report 

PD shares were trading at $33.92 per share on Monday morning, down $0.57 (-1.65%). Year-to-date, PD has declined -18.66%, versus a 22.34% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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