Tag: Inc. (TSLA)

Investor Concerns Rise as Tesla Slashes Prices in China: Sell or Hold?

Posted on by The INO.com Team

China’s electric vehicle (EV) stocks started the new year on the wrong foot, as heightened competition and continued price wars pressurized the profitability of automakers.

Morgan Stanley highlighted growing competition concerns in its note: “Investors remain cautious as China’s auto market has had a volatile start to the year as competition and macro uncertainties persist.”

Also, in a report on the Chinese EV industry earlier this month, Bernstein analysts said, “We expect competition within the domestic market to remain intense and put pressure on pricing and profitability.”

There are too many automakers fighting for EV market share in China. Tesla, Inc. (TSLA) has slashed the prices of its Shanghai-made vehicles by up to 6% in a strategic move to maintain its leading position in the premium segment of the world’s largest EV market.

The Texas-based company recently announced that the base version of the Model Y crossover vehicle starts at nearly $36,000, a decline from about $37,000. The base Model 3 now starts at about $34,500, down from $36,500.

Tesla has cut prices aggressively across its markets worldwide since late 2022 due to higher interest rates, a period of uneconomic certainty, shifting consumer sentiment, and intense competition.

For instance, a U.S. rear-wheel drive Model 3 began at approximately $47,000 in 2022. Its price was cut to about $44,000 in January 2023 and $40,000 following a price cut in April. After one more cut in October, the price of a new U.S. Model 3 ended 2023 at about $39,000.

The recent price cuts in China by Tesla will fuel more fears about competition and profit margins among investors.

Shares of TSLA have plunged more than 7% over the past month and nearly 19% over the past six months.

Now, let’s discuss several other factors that could impact TSLA’s performance in the upcoming months:

Quarterly Deliveries and Production Beat Estimates

Tesla delivered nearly 484,000 vehicles in the fourth quarter, surpassing analyst expectations of 483,173, as compiled by Bloomberg. The company produced 494,989 vehicles, beating the consensus estimate of 482,336. For the full year 2023, the Elon Musk-led automaker reported deliveries of 1.81 million and production of 1.85 million, representing growth of 38% and 35% year-over-year, respectively.

The company delivered 461,538 Model 3 and Model Y vehicles during the fourth quarter and reported production of 461,538 for these models. TSLA didn’t break down Model S or X production or delivery numbers, instead batched them into “Other Models.” It delivered 22,969 other models and produced 18,212 vehicles for the quarter.

In 2022, TSLA reported annual deliveries of 1.31 million and production of 1.37 million vehicles, a nearly 40% increase from 2021.

During the last earnings call held in October 2023, TSLA’s management said that the company would hit at least 1.8 million deliveries for the full year, a number they had revised down from a 2 million target earlier.

Dethroned as the EV Global King

Chinese automaker BYD Co. (BYDDY) reported that it delivered 526,409 fully electric cars during the fourth quarter, topping TSLA for the first time. China’s top-selling car brand reported EV and hybrid sales of 341,043 in December 2023, including 190,754 all-electric cars, aided by aggressive year-of-year discounting. In total, BYD sold 3.01 million vehicles in 2023.

Moreover, BYD produced more than 3 million new electric vehicles in 2023, beating TSLA’s production for a second consecutive year.

Disappointing Last Reported Financials

In the third quarter that ended September 30, 2023, TSLA posted revenue of $23.35 billion, missing analysts’ estimates of $24.14 billion. Its gross profit decreased 22.4% year-over-year to $4.18 billion. The company’s operating expenses increased 42.5% year-over-year to $2.41 billion.

Musk-led EV maker reported income from operations of $1.76 billion, down 52.2% from the prior year’s period. Its adjusted EBITDA declined 24.4% year-over-year to $3.76 billion. The automaker’s adjusted net income attributable to common stockholders decreased 36.6% from the previous year’s quarter to $2.32 billion.

Furthermore, the company reported an adjusted EPS of $0.66 for the third quarter, below the consensus estimate of $0.73. That compared to $1.05 in the same quarter of 2022.

Tesla’s net cash provided by operating activities was $3.31 billion, down 35.1% year-over-year. Its free cash flow decreased 74.3% from the year-ago value to $848 million.

Unfavorable Analyst Estimates

Analysts expect TSLA’s revenue for the fourth quarter (ended December 2023) to increase 6% year-over-year to $25.76 billion. However, the consensus EPS estimate of $0.73 for the same period reflects a 38.3% year-over-year decline. In addition, the company has missed the consensus revenue estimates in three of the trailing four quarters.

For the fiscal year 2023, the company’s EPS is expected to decrease 21.8% year-over-year to $3.18. Street expects the automaker’s EPS to decline 4.6% year-over-year to $0.81 for the first quarter ending March 2024.

Suspension of Production at German Factory

According to Reuters, Tesla plans to suspend most production at its factory outside Berlin in Grunheide, Germany, from around January 29 to February 11 due to the ongoing conflict in the Red Sea that has disrupted global trade.

“The considerably longer transportation times are creating a gap in supply chains,” Tesla told Reuters in a statement.

Analysts at Baird estimate Tesla produces between 5,000 vehicles and 7,000 vehicles per week at its Berlin factory. The shutdown of this vehicle assembly plant in Germany would result in a 10,000-14,000 hit to deliveries in the first quarter of 2024, said analysts Ben Kallo and David Sunderland in a note.

The Baird analysts added that they are “wary” of further effects on the company’s supply chain, and they are “closely monitoring” any impact on its shipping routes from China.

Tesla EVs in Regulators’ Scrutiny

Moving into 2024, Tesla faces growing pressure from regulators. The auto giant faces a new investigation from regulators in Norway and Sweden after a Reuters report alleging that the company covered up defects and charged its customers for repairs that should have been under warranty.

In a statement to Reuters, Sweden’s Transport Agency confirmed “that investigative work is also underway with us” shortly after Norway’s traffic safety regulator launched its probe into reports of repeated suspension failures affecting Tesla models.

Norwegian Public Roads Administration (NPRA) senior engineer Tor-Ove Satren stated that the agency began questioning Tesla in September 2022 and asked the auto company to assess consumer complaints about lower rear control arms breaking on its Model S and X vehicles.

Satren added the agency could recommend that Tesla recall all model years of the S and X vehicles to replace rear lower control arms if it determines they pose a “serious risk.”

Concerns Surrounding Tesla’s Cybertruck

Experts raised safety concerns regarding the angular design of Tesla’s Cybertruck as the electric pickup truck’s stiff stainless-steel exoskeleton could hurt pedestrians and cyclists, damaging other vehicles on roads.

“The big problem there is if they really make the skin of the vehicle very stiff by using thick stainless steel, then when people hit their heads on it, it’s going to cause more damage to them,” said Adrian Lund, the former president of the Insurance Institute for Highway Safety (IIHS), whose vehicle crash tests are an industry standard.

Elon Musk earlier mentioned in Tesla’s third-quarter earnings call that the company was facing several challenges in scaling its production. He also cautioned that Cybertruck won’t deliver considerable positive cashflow for 12 to 18 months after production starts.

Musk said, “It is going to require immense work to reach volume production and be cashflow positive at a price that people can afford” with the Cybertruck. He added, “I just want to temper expectations for Cybertruck. It’s a great product, but financially, it will take a year to 18 months before it is a significant positive cash flow contributor.”

Elevated Valuation

In terms of forward non-GAAP P/E, TSLA is currently trading at 68.73x, 345.6% higher than the industry average of 15.42x. Likewise, the stock’s trailing-12-month EV/Sales and EV/EBITDA of 6.94x and 41x are significantly higher than the industry averages of 1.23x and 9.88x, respectively.

Additionally, the stock’s forward Price/Sales of 7.12x is 695.1% higher than the industry average of 0.89x. Its forward Price/Cash Flow multiple of 54.58 compares to the industry average of 9.88.

Decelerating Profitability

TSLA’s trailing-12-month EBITDA margin and net income margin of 15.80% and 11.21% are higher than the respective industry averages of 10.96% and 4.56%. However, the stock’s trailing-12-month gross profit margin of 19.81% is 44% lower than the 35.38% industry average.

Also, the stock’s trailing-12-month levered FCF margin of 1.68% is 68.9% lower than the industry average of 5.40%.

Bottom Line

TSLA has repeatedly cut prices in China and other global markets since late 2022, leading other automakers to respond and squeezing profit margins industry-wide. Several price cuts were made due to weakened demand amid higher interest rates and a period of economic uncertainty coupled with intense competition in the EV industry.

Following the decline of news that the company could suspend production at its Giga Berlin factory due to Red Sea-related supply disruptions, Tesla’s stock plunged further after the automaker announced new price cuts in China. These price cuts come as competition continues to get intense on the Chinese mainland.

Moreover, BYD has gone more upmarket, pushing into segments where TSLA operated and found success.

The automaker’s third-quarter revenue and earnings missed analysts’ estimates. Further, Wall Street appears bearish about TSLA’s outlook as the company grapples with several challenges, including supply disruptions, growing regulatory concerns, sliding margins due to price cuts, intense competition, and weakened consumer demand amid a high-interest rate environment.

In mainland China, passenger EV sales growth plunged to 28% in the third quarter of 2023 compared to 108% in the same period a year ago, as per China Association of Automobile Manufacturers data quoted by Fitch Ratings.

According to Fitch Ratings, the growth slowdown will get worse this year. “We expect China’s domestic passenger car demand to increase modestly in 2024 to nearly 22 million units amid economic uncertainty,” said Fitch Ratings.

Considering these factors, TSLA shares are best avoided now.

TSLA’s Breaking Point: The 2.2 Million Recall and Market Impact

Posted on by The INO.com Team

2024 has begun with an unfortunate dip in fortune for leading American car manufacturer Tesla, Inc. (TSLA), as it finds itself relegated to the 10th spot on the leaderboard of the highest-valued corporations in the S&P 500. The plummeting value of Elon Musk's TSLA shares by over a quarter this year has significantly eroded the EV company's market cap to approximately $589 billion.

The downturn was initiated by TSLA's prediction of a dramatic deceleration in deliveries for the year 2024, contrasting to last year’s 21% commendable growth rate. This foreboding outlook has unnerved investors, culminating in a steady descent in TSLA's stock value.

Adding to its woes, TSLA is compelled to recall practically all the automobiles it has sold in the U.S., owing to the inadequately sized warning lights on the dashboard. The expansive recall spans about 2.2 million vehicles, such as the Model S, Model Y, and the Cybertruck, which all share the faulty warning light issue, sold between 2012 and 2024.

TSLA owners may have to grapple with yet another setback. Amid the warning light debacle, emerging reports of steering issues might necessitate a further recall of around 334,000 TSLA vehicles.

Now, let us delve into the crux of the matter…

The National Highway Traffic Safety Administration (NHTSA) issued multiple recalls of TSLA vehicles due to an issue with brake, park, and antilock brake warning lights. The notification displays for these crucial safety features use a font size beneath the minimum requirement established by federal standards, potentially hampering readability. This could subsequently raise the threat of collisions. The recall will be executed through over-the-air (OTA) software updates, as per the information provided by NHTSA. There is also an ongoing investigation into complaints about steering failures, which may result in an additional future TSLA recall.

Last July, NHTSA started investigating several claims regarding loss of control on the 2023 Model Y and Model 3 vehicles. TSLA has reportedly commenced the software updates already, with vehicle owners slated to receive notification letters from March 30 onwards.

Drivers reported losing control over steering, often coupled with warnings of power-assisted steering being restricted or disabled. In one instance, a driver was allegedly unable to complete a turn, resulting in a collision with another car. There were also reports of TSLA cars blocking intersections or roadways, with over 50 vehicles necessitating towing.

The current predicaments are not the only instances of issues prompting TSLA recalls. In December, an over-the-call recall curbing the use of its Autopilot feature following a two-year-long NHTSA investigation into roughly 1,000 crashes reportedly occurring while the semi-automated feature was active. Concurrently, a year ago, there was a recall of 363,000 U.S. vehicles equipped with its "full self-driving" or FSD function – a decision by NHTSA ruling citing violation of traffic regulations by FSD-enabled vehicles.

Both NHTSA and the National Transportation Safety Board (NTSB) have been probing into incidents involving TSLA vehicles employing multiple driver-assist features, including crashes at the scene of other accidents involving emergency vehicles.

Meanwhile, TSLA continues to draw public and legislative attention over accusations of autopilot-contributed accidents. Furthermore, battery-related malfunctions, including fires, have been documented in TSLA vehicles. Despite the consensus on the safety of EV batteries, these events have reinforced scrutiny of EV safety norms and the possible risks intrinsic to their power storage systems.

The recent recall did not necessitate personal visits to the service center by owners of TSLA vehicles. A remote resolution was provided by the automaker, effectively negating substantial costs or liabilities stemming from the recall incident. As observed in TSLA's most recent earnings report, they allocated $2.33 billion in 2023 toward warranty provisions, a figure that accounted for 2.4% of their total annual revenue of $96.77 billion. In addition, TSLA's strong liquidity and profitability were underscored by its net income of $15 billion and an operating cash flow of $13.26 billion in the fiscal year 2023.

Despite these positive numbers, TSLA's reputation could take a hit due to a successive wave of safety concerns.

The company's future success hinges on its capacity to bolster production and delivery frameworks. Past delays in product launches and production ramp-ups could pose a recurring issue. Instances of unexpected supplier-related issues affecting the initial ramp of the first Model X and challenges in ramping full automation for specific initial Model 3 manufacturing processes are indicative of such potential difficulties.

Moreover, as TSLA aims to broaden its vehicle offerings and extend its global footprint, assurances cannot be given regarding its ability to successfully and promptly introduce and scale new and unique manufacturing methods or design elements related to new products.

In addition to the recalls, in less than two months, the EV giant temporarily suspended production at its Giga Berlin plant in Germany and recently faced significant legal repercussions. Its stocks dwindled after Germany’s SAP canceled EV procurement plans from TSLA due to delays in delivery schedules and unpredictable price variations.

TSLA’s significant price reductions on models across the U.S., China, and other regions could catalyze sales but may concurrently exert negative pressure on the company's gross margins. Increased costs of raw materials and obstacles in logistics are anticipated to produce a detrimental effect on overall performance results.

On top of these factors, financial analysts have lowered their estimates for the current year based on diminished delivery projections. Financial firm Piper Sandler shared its less-than-promising forecast for the auto manufacturer, predicting the delivery of around 1.93 million vehicles this year. This prediction corresponds to a growth rate of approximately 7%, significantly less than CEO Elon Musk's ambitious plan of achieving a 50% annual growth target he set three years ago.

For the fiscal first quarter ending March 2024, analysts expect TSLA’s revenue to increase 9.3% year-over-year to $25.49 billion, while its EPS is expected to decline 20.4% year-over-year to $0.68.

TSLA’s stock is trading below its 50-, 100-, and 200-day moving averages of $228.55, $233.28, and $232.20, respectively, indicating a downtrend.

However, Wall Street analysts expect the stock to reach $218.57 in the next 12 months, indicating a potential upside of 18.1%. The price target ranges from a low of $23.53 to a high of $345.

Bottom Line

TSLA remains a pioneering force in technological innovation, consistently spearheading the development of groundbreaking ideas and products. However, this appears to be outside the realm of safety, considering the recent recalls. As technology advances, it becomes imperative for TSLA to address safety concerns and establish transparent guidelines regarding product liability to preserve public trust and uphold stringent safety standards.

Automobile manufacturers traditionally have strategies in place to deal with warranty and recall situations, often setting aside funds reserved for such eventualities. Although a recall can potentially affect fiscal performance, it is generally unusual for one to significantly hamper quarterly earnings.

For investors, hardware recalls that necessitate physical dealership visits are usually more costly than software recalls. Given that TSLA's current major recall will be remedied through OTA software updates, its direct financial implications on the company are predicted to be minimal.

However, investors must remain vigilant for potential indirect ramifications. The recalls could detract from TSLA's credible defense in numerous prominent lawsuits relating to autopilot-linked crashes. Until now, TSLA has triumphed in these cases by underlining the necessity of active driver engagement and supervision, as stipulated in the owner's manual and online resources.

Notably, there is significant potential for the company to boost its profit margins through full self-driving subscriptions. Also, amid the expanding energy storage realm, TSLA is primed to become the leading supercharger network provider for EVs across America.

With a $3.6 billion investment dedicated to expanding the Reno, Nevada Gigafactory, TSLA is on course for mass-producing the Semi and the batteries it requires, plus the $2.4 million Megapacks. This initiative is anticipated to spur considerable sales growth due to TSLA's Lathrop, CA plant.

In mid-2025, TSLA plans to commence production of the $25,000 Redwood model – a potential game-changer in EVs. This development comes alongside the revamped Model 3 Highland and the Model Y, already the world's top-selling vehicle. These revamped models could likely boost sales performance.

TSLA's relentless focus on efficient cost reduction is expected to amplify the competition's challenges further. Established automakers looking to pivot toward EVs have been consistently losing money, leading them to postpone their plans. This could predictably prove advantageous to TSLA in the long run. Coupled with EV startups struggling to sell their limited inventory, they have been compelled to lay off newly recruited and trained employees — developments that may hinder their chances of business sustainability.

However, investors should note that TSLA faces financial headwinds amid the high-interest rate environment, which exacerbates financing costs and decreases discretionary consumer buying patterns. TSLA’s aggressive pricing strategies enacted in response to diminished demand and fierce competition have not achieved the desired impact.

Worrisome, too, is TSLA's non-GAAP forward P/E multiple of 56.57, which exceeds the industry average of 15.82. Should TSLA's market cap decrease to meet this industry average, it might significantly undermine shareholder confidence.

Investment consideration should further factor in ongoing uncertainty linked to analysts' skeptical views on the company's prospects. This skepticism represents a potential risk for current or prospective investors considering TSLA stock.

Hence, investors should consider the overall scenario and proceed with caution before investing in the stock.

End of Year Outlook: Is It Time for Investors to Re-evaluate TSLA Stock?

Posted on by The INO.com Team

 

Tesla, Inc. (TSLA) employees initiated a strike in late October when approximately 120 mechanics at 12 TSLA repair shops in seven cities across Sweden protested against TSLA's refusal to endorse a collective bargaining agreement.

Continuing ripple effects were seen across various segments – from custodial and dock workers to postal employees and metalworkers. Sympathy strikes ensued, disrupting the company's operations from unloading vehicles off boats and obtaining vehicle registration plates.

Sweden, boasting one of Europe's most powerful labor movements, stands as the stinging backdrop. The strike is seen as a clash between the Swedish and American ways of doing business and a fight to protect the Swedish union model, covering about 90% of its workforce.

Employees and employers unanimously support this system. This universal approbation is warranted given that the Swedish labor relations model has maintained relative industrial tranquility between corporations and wage earners for decades.

TSLA, on the contrary, is known for opposing unionization in its workplaces and has a different corporate culture and vision. Elon Musk-led TSLA may have inadvertently chosen a contest difficult to win by retorting against this norm. What began as a localized dispute has now escalated to potentially considerable global implications.

Casting wider ripples, there are projections for the labor movements and automotive workers within Europe and extending to the U.S. Arturo Vasquez, an ombudsman in the IF Metall union – the largest in Sweden, has reportedly reached out to counterparts across Europe and the U.S. With this, he aims to gather support, possibly leading to similar moves in their respective domains.

According to car.info data, TSLA reportedly registered 1,516 new cars in November, representing a sales increase of 175.2% year-over-year. This performance is particularly noteworthy given the mounting efforts of IF Metall against the EV manufacturer.

Furthermore, TSLA aims to maintain a growth rate of 50%, with aspirations to sell 2.7 million vehicles by 2024. The automaker plans to augment its production capacity across Fremont, Shanghai, Berlin, and Texas facilities. Additionally, the company aims to enhance its product range and features, including introducing new models – like Model 3 Highland and Model S Plaid, with Cybertruck recently added to the lineup.

However, with no signs of an impending agreement between TSLA and IF Metall, the ongoing strike could disrupt TSLA's ambitious objectives. In September, EVs constituted a 63.4% market share in Sweden, an increase from last year's 55.2%. TSLA’s Model Y was the top-selling vehicle in Sweden year-to-date, underscoring its dominant stance.

The strike could compromise TSLA's market share and customer loyalty in Sweden and other Nordic countries, where the brand has a substantial presence and exciting demand prospects. It could impact the delivery and service of TSLA vehicles, thus potentially undermining the brand's reputation in the region.

TSLA recently filed a lawsuit against the Swedish state via Sweden's Transport Agency due to a strike by postal workers that halted delivery of license plates for the automaker's new vehicles, creating additional regulatory hurdles. The company could face fines, sanctions, or injunctions, which could dent the company’s profitability.

Moreover, TSLA's global supply chain and production network could experience disruptions and delays, affecting the availability and quality of components. Expansion of operations and facilities might also face challenges.

Furthermore, TSLA's capability to attract and retain talent, particularly in Europe, where the company is aggressively investing and recruiting, could be impacted. It could further hamper the morale and motivation of TSLA’s existing employees. Consequently, this could blemish TSLA’s image as a leading pioneer in the EV and clean energy industry, thereby lessening its allure to investors and partners.

Since the issue is unlikely to dissipate soon, the company may experience a downturn in revenue and profit, along with muted growth prospects, thus potentially leading to a fall in its share price. The projected declining cash flow and profitability could impede the company's ability to invest in new ventures and innovations.

Over the past five years, TSLA's impressive rally has resulted in a robust return of over 900% for its shareholders, equivalent to some investors' lifetime returns. Nevertheless, its lofty valuations have set the bar high for expectations.

TSLA has historically foregone dividend payments, choosing instead to reinvest profits into the organization to fuel future growth. While some analysts and investors anticipate it could begin issuing dividends as the company matures and turns profitable, the ongoing strike and its impacts could delay or even nullify these possibilities due to declining cash flow and earnings.

Let’s look at some that may prompt investors to proceed with caution:

Deteriorating Financials

Although TSLA’s revenue grew 9% year-over-year to $23.35 billion in the third quarter of 2023, the company’s total gross profits fell 22% year-over-year. Its non-GAAP net income declined 37% from the year-ago quarter to $2.32 billion despite robust Model 3 and Model Y sales.

Despite a 9% year-over-year revenue increase to $23.35 billion in the third quarter of 2023, TSLA’s total gross profits declined 22%. This decline was accompanied by a 37% decrease in non-GAAP net income to $2.32 billion despite robust sales from Model 3 and Model Y vehicles.

According to Cox Automotive, TSLA’s market share fell to the lowest ever at 50%, a stark contrast from the previous year's near 65%. Furthermore, the firm does not project any imminent revenue surge following the Cybertruck launch.

Price Slashing

TSLA initiated a competitive pricing battle earlier this year, sparking enthusiasm among industry observers who perceived it as a manifestation of its production efficiencies. However, the company later confirmed that this strategy was primarily demand-driven.

Implementing over six decisive price reductions across its four vehicle models unequivocally demonstrates that the market competition is intensifying, and customer demand is not keeping pace with the company's inventories.

This dynamic is unfavorable and offers a cogent explanation as to why TSLA's operating margin substantially shrunk to 7.6% in the third quarter, down from its prior-year quarter level of 17.2%.

Unfavorable Analyst Estimates

Analysts expect TSLA’s revenue for the fourth quarter (ending December 2023) to come in at $25.62 billion, suggesting an increase of 5.1% year-over-year. However, the consensus EPS estimate of $0.74 for the quarter reflects an alarming 38.1% year-over-year decline.

Moreover, for the fiscal year 2023, the company’s EPS is expected to decrease 21.4% year-over-year to $3.20, while revenue is expected to come at $97.31 billion.

Bottom Line

Over the previous decade, TSLA has emerged as one of the top performers on the expansive S&P 500, delivering massive returns.

The company's robust progress has positioned it among the most significant publicly traded bodies, boasting an immense market cap of approximately $763 billion. As such, TSLA secured a crucial position in the so-called 'Magnificent Seven,' significantly driving the broader market to greater heights in 2023.

Furthermore, the automaker is looking to broaden its revenue streams beyond the traditional sales and leases of EVs. There lies a sizeable opportunity for TSLA to amplify its profit margins by selling full self-driving subscriptions.

Moreover, TSLA's presence within the energy storage sphere continues to expand, with the company poised to become the principal supercharger network provider for EVs across the U.S.

Despite the laudable accomplishments of Elon Musk as a leader and innovator, there are concerns regarding the potential pitfalls of his management style. Notably, there has been criticism surrounding persistent issues with adhering to initially set timelines, which cast shadows of doubt moving forward. The ongoing strike adds to the woes.

Concurrently, the company faces financial headwinds with high-interest rates, a facet exacerbating financing costs and suppressing consumer discretionary purchasing behavior. TSLA’s assertive actions toward price reduction in response to weakened demand and intensifying competition have failed to resonate as intended.

Moreover, TSLA's non-GAAP forward P/E multiple sits at a lofty 75.04, significantly surpassing the industry average of 14.87. Should TSLA's market cap decline to meet this industry average, shareholders may find their confidence dented considerably.

Additional trepidation stems from analyst skepticism surrounding the company's prospects. This is a concern for current or potential investors considering TSLA stock. Therefore, investors may wish to reassess their stance before investing in the stock.

Is NIO (NIO) Stock a Ticking Time Bomb?

Posted on by The INO.com Team

Nio Inc. (NIO), a leading China-based electric vehicle (EV) manufacturer, has performed poorly over the past few months. Shares of NIO have plunged more than 5.4% over the past month and 17% year-to-date.

But, as per the latest headlines, it may appear that the situation will improve from here for the EV maker. On November 1, NIO announced its October 2023 delivery results. The company delivered 16,074 vehicles in October, growing by 59.8% year-over-year. The deliveries comprised 11,086 premium smart electric SUVs and 4,988 premium smart electric sedans.

Although deliveries surged by a high double-digit figure last month, growth was not as impressive sequentially. In September 2023, NIO delivered 15,641 vehicles. So, October’s deliveries represented a sequential increase of just 2.8%.

The company’s figures are lackluster compared to China-based peers such as Li Auto Inc. (LI) and Xpeng Inc. (XPEV) and past expectations.
LI’s October deliveries totaled 40,422 vehicles, increasing by 302.1% year-over-year and a sequential growth of 12.1% (based on 36,060 vehicle deliveries in September). Further, XPEV’s deliveries came in at 20,000 in October, an increase of 292% year-over-year and up 31% on a sequential basis.

While NIO’s stock did soar after the release of its delivery results, the rise was modest (nearly 2.1%) compared to LI (almost up 3.5%) and XPEV (up 7%). Moreover, the broad market rally on November 1 may have played a larger role than the vehicle deliveries news in NIO's rally.

Although NIO found support in recent trading days, the stock will likely suffer immensely in the upcoming months. So, we maintain a bearish stance on this EV stock.

Now, let’s review in detail what has happened in the past few months and discuss several factors that could impact NIO’s performance in the near term:

Poor Financial Performance

For the second quarter that ended June 30, 2023, NIO reported revenue of $1.21 billion, missing analysts’ estimate of $1.27 billion. The revenue translates to a decline of 14.8% from the second quarter of 2022. Its vehicle sales came in at $990.90 million, down 24.9% from the second quarter of 2022. The company’s gross profit decreased 93.5% from the year-ago value to $12 million.

NIO’s operating expenses grew 47.2% year-over-year to $849.65 million. Its non-GAAP loss from operations was $753.50 million, an increase of 132% year-over-year. The company’s non-GAAP net loss widened by 140.2% from the prior year’s quarter to $751 million. Furthermore, the automaker’s loss per share came in at $0.51 versus the consensus loss per share estimate of $0.24.

Unfavorable Analyst Expectations

Analysts expect NIO’s revenue for the third quarter (ended September 2023) to increase 47.2% year-over-year to $2.66 billion. However, the company is estimated to report a loss per share of $0.23 for the same period. NIO has also missed the consensus revenue estimate in three of the trailing four quarters and the consensus EPS estimates in all four trailing quarters, which is disappointing.

In addition, the Chinese EV maker’s EPS is expected to remain negative for at least two fiscal years.

High Levels of Indebtedness

On September 25, NIO closed its offering of $500 million in aggregate principal amount of convertible senior notes due 2029 and $500 million in aggregate principal amount of convertible senior notes due 2030. The issuance of a $1 billion convertible senior notes sent ripples of concern among investors and led to a significant drop in NIO’s stock price.

A debt offering generally indicates the company’s need for cash. Although issuing shares can be dilutive, a debt offering results in increased scrutiny by investors as excessive debt is often considered to hinder the company’s ability to generate a cash surplus.
Thus, higher levels of indebtedness due to additional debt offerings can be alarming as they potentially undermine the position of common stockholders. This apprehension potentially influences behavior toward NIO, reflecting concerns about the EV maker’s debt strategy and its implications for future financial stability and long-term viability.

NIO’s total liabilities were $9.52 billion as of June 30, 2023.

Struggling to Boost Sales in Europe

The Chinese EV manufacturer NIO is scrambling to drive sales in Europe, its first area of international expansion. The company is considering building a dealer network across Europe to speed up sales growth despite China-based EVs facing potential tariffs in the region.

NIO, an aspiring competitor to a world-class EV brand, Tesla, Inc. (TSLA), launched in Norway in 2021 and entered Germany, Sweden, Denmark, and the Netherlands in October 2022, enabling customers to purchase directly from its stores or online.

However, Nio began assessing dealers in key European markets after the company’s President said sales in Europe were missing expectations.
A source said that dealers were being considered both for Nio-branded cars sold in Europe and for project “Firefly,” a new affordable EV brand that the company plans to export to Europe from 2025.

Another reason to use dealers would be to ease cash pressure on NIO, which is prioritizing spending on research and battery swapping stations in China, that source added.

Job Cuts in the Face of Heightened Competition

Shanghai-based EV company Nio will reduce job positions in November and cut or defer some investment, strategic moves aimed at boosting the company’s viability as it grapples with widening losses and intense competition.

Demand for EVs has dampened in China as consumers prefer more economical plug-in hybrids, sales of which grew nearly 84.5% in the first nine months of 2023, helping automakers LI and BYD Co. Ltd (BYDDY) to gain market share.

Also, a price war started by world EV leader TSLA a year ago is dragging down the profitability of other EV makers, which have also stepped up efforts to cut costs and build partnerships to survive the escalating competition.

According to an internal letter signed by CEO William Li seen by Bloomberg News, NIO will slash its staff by 10% this month.

“Duplicate” and “inefficient” roles will be eliminated, and project investment that won’t contribute to the company’s financial performance within three years will be cut or differed, Li said.

Nio has been in a fight for survival amid fierce competition in the nation’s automotive industry over the past two years. Li wrote that to “qualify for the next round of competition,” the company must reduce costs and ensure resources for critical business areas. Also, he apologized to the colleagues who will be affected by the adjustments, as per the memo.

Price War in the EV Market

A price war instigated by Tesla a year ago increased the pressure in the EV industry, with other companies following by cutting prices in a race to attract customers as their sales showed signs of slowing.

Earlier this year, NIO slashed prices for its cars and announced delaying plans to spend on expansion and research. The Chinese electric car brand cut car prices by the equivalent of $4,200 and ended free battery swaps for new buyers.

Bottom Line

Once considered one of the dominant players in China’s EV market, NIO has poorly fallen short of its sales estimates and continued to post massive losses. The company’s revenue and earnings missed analysts’ expectations in the last reported quarter. Further, analysts and investors appear bearish about its growth prospects.

While its strategic initiatives, including job cuts and lower investment, could boost profitability in the long run, the EV maker continues to face near-term challenges with consumer preferences, fierce competition in the EV market, pricing power, widening losses, and lower margins.
Given its deteriorating financials, declining market share, lower profitability, and short-term uncertain outlook, NIO is best avoided now.