Can Budget Brands Firefly & Onvo Reverse Nio Stock’s 60% Decline?

Chinese luxury electric vehicle maker Nio stock (NYSE:NIO) delivered a total of 20,176 vehicles for August, up just about 4.4% versus the same quarter last year. While Nio’s performance was well behind rival Li Auto (NASDAQ:LI) which saw sales grow 38% year-over-year to 48,122 vehicles, it did a bit better than Xpeng (NYSE:XPEV)  which grew sales by just about 2.5% year-over-year to 14,036 units. Although Nio has one of the wider model lineups among the emerging EV players – with a total of eight models on sale – the company’s deliveries have been slowing amid mounting competition. Nio’s stock price also remains down by nearly 60% year-to-date.

China’s economic growth has been weak with GDP rising by just about 4.7% in the second calendar quarter of 2024, down from 5.3% in the first quarter, as the country faces a downturn in the real estate market and a slow rebound from stringent Covid-19 lockdowns that ended over a year ago. Moreover, consumer spending and domestic consumption also remain weak in China. Retail sales recently fell to an 18-month low due to deflation, as businesses have been cutting prices while employers have been reducing salaries with unemployment among the youth remaining high. The broader high interest rate environment also hurts automotive companies by making financing costs higher.

Nio is looking to turn around its fortunes by doubling down on the lower end of the EV market. The company introduced its sub-brand Onvo in May, with the first model – the L60 – set to officially launch later this month. Nio has already opened 105 Onvo stores across 55 Chinese cities to showcase the new model which is priced at RMB 219,900 ($31,010) – more than 10% cheaper than Tesla’s Model Y. While Nio’s flagship brand targets the premium market which is priced at RMB 300,000 ($42,000) and above, Onvo is aimed at the mass market – covering the range between RMB 200,000 ($28,000) and RMB 300,000 ($42,000). Nio is also planning to move further downmarket with another brand called Firefly, expected to debut by the end of this year. Firefly’s first model is anticipated to be a blend of a small SUV and a compact SUV. The evolving regulatory environment could also benefit Nio’s lower-end push. China recently introduced new incentives of RMB 10,000 (approximately $1,410) for consumers who switch from gasoline to electric or low-emission vehicles, with reports suggesting this subsidy could be doubled to RMB 20,000 ($2,800) per vehicle.

Notably, NIO stock has underperformed the broader market in each of the last 4 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 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?

Nio’s valuation is also attractive. The stock trades at about $4 per share, about 0.8x consensus 2024 revenues, which is not expensive considering that the company’s revenues are projected to grow by over 20% this year and by over 35% next year.  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.

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