Can A New Model Y Challenger Get Nio Stock Back On Track?

Chinese luxury electric vehicle maker Nio (NYSE:NIO) recently unveiled the first vehicle under its lower-priced Onvo brand, taking on Tesla’s Model Y crossover, which is the world’s best-selling EV. The new vehicle will have a starting price of RMB 219,900 yuan (about $30,500), which is about 10% below Tesla’s Model Y in China, and should go on sale around September of this year. The vehicle looks compelling, given that it is a bit more spacious than the Model Y while offering a lower average energy consumption. Nio intends to expand the Onvo brand, adding one new model per year under the new low-priced brand, the next of which is expected to be a model targeting larger families.

Nio has fallen behind in the EV race in China over 2023, delivering a total of about 160,000 cars over the last year, compared to Li Auto which delivered over 375,000 units, although its growth has picked up a bit in recent months, led by updated versions of its premium vehicles ES8, ES6, EC7, EC6, and ET5T. That said, it remains to be seen how well the company will fare. The Chinese EV market is extremely crowded, with over 100 brands competing in the space. There has also been a severe price war, with players including Tesla reducing prices for their vehicles multiple times over the past year while scaling back production.

NIO stock has suffered a sharp decline of 90% from levels of $50 in early January 2021 to around $5 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Notably, NIO stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -35% in 2021, -69% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that NIO underperformed the S&P in 2021, 2022, and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the mega-cap stars GOOG, MSFT, and AAPL.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NIO face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Although there are concerns about global EV demand, things appear to be a bit better in China. New-energy vehicle sales including battery-powered EVs and plug-in hybrids touched an estimated 800,000 units for April, marking an increase of 33% compared to last year. The Chinese government has also been supporting the EV industry, recently announcing new incentives of RMB 10,000 (about $1,410) for consumers to trade their older gasoline cars for electric and low-emission vehicles by year-end. This incentive could benefit mass-market EVs more than luxury vehicles, potentially helping Nio’s Onvo brand. Nio is also looking to keep costs low with its new models, with the company buying batteries from BYD, while abandoning plans to produce batteries in-house. Nio has also invested considerably into building out its EV charging infrastructure including battery-swapping and charging stations and this could also give the company an advantage over rivals. Nio stock trades at just about $5.30 per share, just about 1x consensus 2024 revenues. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Nio stock compares with its rivals Li and Xpeng.

[1] Returns as of 5/17/2024
[2] Cumulative total returns since the end of 2016

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