NIO: Huge revenue growth forecast for Q2 2024 unlikely to continue (NYSE:NIO)

Chinese electric vehicle manufacturer and brand NIO’s (NYSE:NIO) (OTCPK:NIOIF) Second quarter (Q2 2024) results are critical at a time when the stock is lagging both long-term and near-term levels.

Not only is it trading at levels 94% lower than Its all-time highs recorded in May 2021, its current price is weak even compared to its performance over the past 52 weeks. It is 64% lower than the 52-week high and even 34% lower than the average during this period. Even year to date (YTD) it has declined significantly (see chart below).

What to expect from Q2 2024 results

The company’s Q1 2024 outlook, released in early March, followed by worse-than-expected actual sales numbers (see chart below) sent the stock down, and it hasn’t recovered since. Results due on September 5 may provide some support, however price drop and might even shed some light on what to expect in the long run in terms of NIO’s battery innovations.

Expect a huge increase in income…

There is good news to look forward to on the financial side, with the company seeing revenue growth between 89.1% and 95.3% over last year. Part of the reason for this is a weak base period, as Q2 2023 saw revenue decline 14.8% YoY.

But it’s also due to a robust trend in shipments in Q2 2024, which saw a 144% increase over last year. This increase was notable because it was about 10 percentage points higher than the midpoint of the NIO’s guidance range. It is also particularly encouraging after a 3% year-over-year contraction in Q1 2024.

… but heavy operating losses may continue

However, despite expected robust revenue growth, NIO’s operating losses will continue. Not even with an improved gross margin in Q1 2024 to 4.9% from Q1 2023 when it was at 1.5%. And that’s because of NIO’s large operation at 59.4% of revenues in Q1 2024. This alone reflects the fact that gross margin is not matching expenses.

In numerical terms, to estimate the operating loss for Q2 2024, two assumptions were made. One where revenues are in the middle of the guidance range at 92.2% and two, both gross margin and operating expense ratios remain flat at Q1 2024 levels.

This results in an operating loss to revenue ratio of 54.5%, almost the same as in Q1 2024. But in absolute terms, it is a significant increase of 51.1% compared to an increase in losses of 5.5% YoY in Q1 2024.

The outlook for Q3 will be muted

Additionally, even big revenue gains may be overshadowed by the company’s outlook for Q3 2024, which will be part of future results. As it happens, NIO’s vehicle sales momentum did not continue from Q2 2024. Growth reversed in July, contracting 3.4% from last year. It rose in August, up 4.4% from last year, but even that is nowhere near the growth seen in Q2 2024.

Positive battery developments

However, the launch could still provide insight into the company’s progress on battery innovations and services, which look promising from a longer-term perspective. Here’s how.

• Long battery life: The company’s founder and CEO William Li drew attention when he live-streamed his 14-year road trip across China earlier this year. The idea was to demonstrate the long-lasting battery.
• Battery change: The company’s disruptive battery change technology that enables change in less than three minutes is another innovation. It has also found its takers, not just among users, but also other electric vehicle companies who have collaborated to make this technology work, with 2,480 exchange stations installed to date.
• Battery as a service (Baas): With 70% of NIO users choosing Baas, the service looks like a success since its launch in March. Not only does it allow for lower upfront costs, but the company also recently lowered the monthly rent, which explains its popularity.

With that as the background, Li attributed these to the increase in the company’s vehicle deliveries in April and May, among others, saying:

Despite increasingly intense market competition, NIO’s premium brand positioning, industry-leading technologies and innovative “rechargeable, exchangeable, upgradeable” energy experience have been recognized for their exceptional competitiveness, leading to sequential growth solid performance of vehicle deliveries in recent months.”

The future is still uncertain

Despite expected short-term sales growth and long-term potential in NIO’s battery development, the future is still uncertain. First, as discussed above, even in Q3 2024, the company may see a reversal of the dynamic revenue growth expected for Q2 2024. With intense competition in the electric vehicle market, it remains to be seen whether NIO can present a consistent growth.

Next, the company’s massive operating losses are also a challenge. Even taking into account that price cuts in the electric vehicle market have made it difficult to make a profit in the recent past, the truth is that NIO has never made an operating profit. By comparison, its competitor Li Auto ( LI ) posted one in the most recent quarters and also through 2023. The size of NIO’s operating loss, its thin gross margin and rising operating expenses also do not indicate that that it can become profitable soon.

Also, battery innovations can take time to generate profits. For example, the figures for battery exchanges available so far indicate that the average number of daily exchanges is 27.4 per station, while 60 are needed to break even.

Investor recommendations

The challenges facing NIO continue to make it a no-go stock, even though it is trading at multi-year lows and its trailing-twelve-month price-to-sales ratio (TTM) at sub-1x is lower than both for LI, at 1.05x. and XPeng (XPEV) at 1.47x.

That doesn’t mean it’s without potential. In fact, it has a lot of trucks on the front of the battery. From innovations like the long-range battery to battery swapping, it’s pushing the electric vehicle industry forward. But when that translates into consistent revenue and profitability growth remains to be seen.

The release of Q2 2024 results could provide insight into these developments. But unless there’s something exceptional about them, even with its robust future revenue numbers, it’s hard to see sustained growth in the stock. This is especially so as the numbers will likely be overshadowed by subdued guidance for the next quarter. And it’s probably a big operational loss too. I’m going with a Hold rating on NIO for now.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.