Should you buy Nio stock while it’s still below the IPO price?

Nopehis (NO 3.50%) the stock rose 14% on September 5 after the Chinese electric vehicle (EV) maker released its second-quarter report. Its revenue rose 99% year-on-year to 17.45 billion yuan ($2.4 billion), but missed analysts’ estimates by $40 million. It narrowed its adjusted net loss per American depositary share (ADS) from 3.28 yuan to 2.21 yuan ($0.30), which matched the consensus forecast.

Nio didn’t hit a home run, but its rising deliveries, rising vehicle margins and rosy guidance suggested it was reaching an inflection point. Should investors buy this often-overlooked EV stock while it’s still trading over 20% below its IPO price?

Image source: Nio.

Why bears back down

Nio sells a wide range of electric sedans and SUVs. It differentiated itself from its competitors with removable batteries that could be quickly changed at its battery change stations. This feature addressed long charging times for electric vehicles.

Nio’s annual deliveries more than doubled in both 2020 and 2021, but only grew by 32% in 2022 and 31% in 2023. This deceleration was caused by supply chain constraints, weather-related disruptions, macroeconomic headwinds for consumer spending in China and an ongoing EV price war driven by adzebigger and bigger discounts.

As Nio deliveries slowed, margins on its vehicles fell from a record 20.2 percent in 2021 to 9.5 percent in 2023 as it lost pricing power. Bears have argued that Nio’s business model is unsustainable, and its stock has fallen from an all-time high of $62.84 in February 2021 to less than $4 earlier this year. But in the second quarter, vehicle deliveries and margin improved sequentially and year after year.

Data source: Nio. YOY = year over year.

Nio expects to maintain that momentum with 61,000 to 63,000 shipments in the third quarter, which would represent a 10% to 14% increase from a year earlier, as its revenue grows 0% to 3% from one year to another. It attributes this recovery to its market share gains, the launch of its new ET7 Executive Edition sedan and the expansion of its Onvo smart vehicle brand in China. It is also preparing to launch its new Firefly brand, which focuses on smaller, cheaper vehicles, in Europe.

Analysts expect Nio’s revenue to rise 23% for the full year. Its earnings are also expected to grow at a compound annual growth rate (CAGR) of 27% from 2023 to 2026. That’s an impressive growth rate for a stock with a price-to-sales ratio of just 1. Tesla , which is larger and growing at a much slower rate, trades at 7 times this year’s sales.

But will Nio’s ratings remain under pressure?

Nio’s ratings are weighed down by three main challenges. First, the company will remain deeply unprofitable as it continues to expand its capital-intensive battery exchange networks. Those costs could steadily offset its expanding vehicle margins. It has also doubled its share count since the IPO with stock-based compensation and secondary stock offerings, and that dilution should continue for the foreseeable future.

Second, Nio’s aggressive expansion into Europe with low-cost electric vehicles could be threatened by higher tariffs that took effect in July. Its vehicles to the European Union are now subject to an additional 20.8% tariff on top of its original 10% import duties, and it may need to raise its prices to offset this pressure. Nio relies on the European market to diversify its top line away from China, where it faces tough challenges but still generates most of its revenue.

Finally, lingering trade and political tensions between the US and China continue to turn many investors away from Chinese stocks. So if those tensions don’t ease, Nio could continue to trade at a discount to many US electric vehicle stocks.

So, is it the right time to buy Nio’s stock?

Nio’s outlook is improving, and his low rating should limit his downside potential. However, I don’t think it will get much attention from the bulls unless the US-China relationship improves and the company addresses its challenges in Europe, significantly expands its vehicle margins and gradually reduces its operating losses.

If you plan to ride out this noise for a few years, it might be smart to buy Nio stock while it’s trading below its IPO price. But for now, I prefer to invest in other undervalued EV stocks that aren’t so closely tied to China.