NIO: Still Bullish Over The Long Term After Earnings

Seeking Alpha2023-03-05

SummaryIt appears to me that concerns over margins are overstated - the company very clearly laid out why margin contracted and why it believes it's only temporary.The decision to release a number of ...

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Comments

YekGuo98
2023-03-06
YekGuo98
Ok
Sigit waloyo
2023-03-06
Sigit waloyo
Move on
ArcherWG
2023-03-06
ArcherWG
Noted
Seah CL
2023-03-06
Seah CL
K
w00ters
2023-03-06
w00ters
Ok
GggSlimeR
2023-03-05
GggSlimeR
Thanks & Do not like my comment

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(NYSE: NIO), resulted in the EV maker to fall further out of favor with investors and analysts, as contracting margins and lower-than-expected short-term sales expectations were underwhelming to many.NIO has transitioned from a high-flying, volatile trading stock, to a company that has a long-term vision in place that will take time to fully mature. I think the market has yet to catch up with that reality and continues to overly focus on the short-term performance of the company, when it needs to look at the patient strategy the company has laid out and is working toward executing on.In regard to concerns about shrinking margins, I think the market overresponded to that because management very clearly explained the reasoning behind it, and why it believes it'll significantly improve by the latter part of calendar 2023.As for disappointment over short-term delivery guidance, that is primarily related to the company transitioning to new product lines that should ramp up in the second half of 2023, and if the company executes on its plan, the market should respond positively to the increase in production and deliveries.In this article, we'll look at some of its recent numbers, what impacted margins, the safest way to take a position in NIO, and why I remain very positive on the company over the long haul.TradingViewSome of the numbersRevenue in the fourth quarter of 2022 was $2.33 billion, missing by $230.00 million, but up 62.2 percent year-over-year. Total revenue for the full year 2022 was $7.14 billion, up 36.3 percent year-over-year.Vehicle sales were $2.14 billion in the reporting period, climbing 60.2 percent in comparison to the fourth quarter of 2021. Full year 2022 vehicle sales came in at $6.6 billion, a gain of 37.2 percent over the full year 2021.Vehicles delivered in the fourth quarter of 2022 were 40,052, an increase of 60 percent year-over-year, and up 26.7 percent sequentially. For the full year 2022, NIO delivered 122,486 vehicles, up 34 percent from the full year 2021. Management guided for 31,000 to 33,000 vehicles to be delivered in the first quarter of 2023, representing a potential increase in the range of 20.3 percent to 28.1 percent.Total revenue for the first quarter of 2023 is projected to come in at a range of $1.58 billion to $1.67 billion, representing an increase of 10.2 percent to 16.5 percent year-over-year.By most standards, those would be considered great numbers for most companies, but because expectations have been so high, they were taken as a negative by many investors and analysts; I'm not among them. Taking into consideration its growth strategy, I see them as being very favorable considering the transition to enhanced models at this time.Gross profit in the fourth quarter was $90.1 million, down 63.4 percent year-over-year. Gross margin fell from 17.2 percent in the fourth quarter of 2021 to 3.9 percent in the fourth quarter of 2022.Net loss in the reporting period was -$(847.7) million, or -$(0.51) per share.At the end of calendar 2022, the company held Cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits of $6.6 billion.Vehicle marginVehicle margin was probably the most concerning and talked about concern from the fourth quarter earnings report, so it's worth looking a little deeper into the why of it. First, vehicle margin in the fourth quarter was 6.8 percent, down 16.4 percent sequentially, and down 20.9 percent from the fourth quarter of 2021.The decline in vehicle margin was attributed to three things: \"the increased inventory provisions, accelerated depreciation on production facilities, and the losses on purchase commitments for the existing generation of ES8, ES6, and EC6.\"The transition to new generation ES8, ES6, EC6's had a detrimental impact on vehicle margin in the fourth quarter of 2022. With the new generation models expected to start being delivered in the second quarter of 2023, it's apparent consumers are holding off on buying the previous generation of the models, resulting in a 6.7 impact on vehicle margin. Without that impact, vehicle margin would have been 13.5 percent.With the temporary, unfavorable mix, a larger number of lower-margin ET5s were sold, also putting downward pressure on margins.In the first quarter of 2023 management expects there to be continual pressure on vehicle gross margin, primarily from the transition to the new generation models that will be built on its new NT2.0 platform.Another related factor having an impact on vehicle margin is the additional costs associated with modifying the tooling on its production line at its Factory 1. That should start to improve after the first quarter modifications are completed. NIO CEO William Li said he is confident that the company will be able to bring vehicle gross margin back to a range of 18 percent to 20 percent by the end of 2023.The catalysts he sees bringing that about are, the delivery of new generation models that come with higher vehicle gross margins, an increase in overall product deliveries in the third quarter, and a reduction in costs associated with the drop in prices of raw materials. With product deliveries increasing, the company expects the amortization rate related to fixed costs to improve along with that.It's a long-term gameI think many investors and analysts aren't factoring in the long-term strategy NIO management is engaged in and is instead focusing too much on the short-term results of the company. That isn't anything new, but in the case of NIO, I think the market isn't taking into account the fact the company is releasing a lot of models over a relatively short period of time.What normally happens under those circumstances is, in the near term, a company will experience a slowdown in growth because it takes time for the new models to take hold. In other words, focusing on only a small number of models usually results in faster short-term growth in a growth sector, while introducing a wider range of models normally results in it taking longer for the portfolio to gain traction.So in the short term, a company can experience some pain because of higher costs and a reduction in sales when the market waits for the new models to be released. That's where NIO is at this time, and why, in my opinion, it's going through a lot of the pain it's currently going through, and why it appears to be underperforming in a disproportionate way.How I've looked at the company for some time now is, it's laying a foundation for long-term growth, that once its production capacity increases, and it starts to deliver a strong portfolio of new models, it's going to take off in deliveries and sales, which could surprise the market at the pace it takes off once it has all the pieces in place. It appears that, by the end of 2023, the company should be close to running on all cylinders.ConclusionIt wasn't surprising to see some analysts downgrade the stock after the latest earnings report, but that doesn't phase me at all when considering the very visible strategy the company has in place, and management's commitment to continue to execute on its plan.With the short-term headwinds remaining in play, and uncertainty as to how the market will respond when the numbers come out for the first quarter of 2023, I see the safest way to play NIO for investors considering taking a position, is to dollar-cost average on a consistent basis, and be sure to be disciplined in position sizing.Since the share price was recently near its 52-week low of $8.375, it represents an excellent entry point for those incorporating a dollar-cost average investment strategy. I think the stock could fall further if the first quarter numbers are worse than expected, but that's not a guarantee. For that reason, taking a position at these price levels make sense, and in fact, limits the upside risk for investors that have the potential to lower their cost basis over time if the stock does drop further.The EV market is going to continue to grow, and I believe NIO is going to be a solid performer in the market over the long haul. It's positioning itself well to compete for different demographics at various price points, and once it launches its various products throughout 2023, especially in the second half, I think it's going to be on the way to fulfilling the potential it has.Because I believe the company is in it for the long term and has a solid business plan, I consider it a set-it-and-forget-it holding that I no longer watch on a daily basis like I did in the past when the volatility provided great swing trade and day trade opportunities.","kind":"news","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9940553006,"gmtCreate":1678064669905,"gmtModify":1678064673598,"author":{"id":"3581548914971628","authorId":"3581548914971628","name":"YekGuo98","avatar":"https://static.tigerbbs.com/6bdd5398a1a15dc43469cee5e6b364b4","vip":1,"crmLevel":6,"crmLevelSwitch":0,"idStr":"3581548914971628","authorIdStr":"3581548914971628"},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940553006","repostId":1165421317,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9940525019,"gmtCreate":1678061494932,"gmtModify":1678061498413,"author":{"id":"4106663006772770","authorId":"4106663006772770","name":"Sigit waloyo","avatar":"https://static.itradeup.com/news/793d6f1c1bc32e2f7cdb8ef7a8931a1c","vip":1,"crmLevel":1,"crmLevelSwitch":1,"idStr":"4106663006772770","authorIdStr":"4106663006772770"},"htmlText":"Move on","listText":"Move on","text":"Move on","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940525019","repostId":1165421317,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9940565101,"gmtCreate":1678056390503,"gmtModify":1678056394490,"author":{"id":"3581837121803380","authorId":"3581837121803380","name":"ArcherWG","avatar":"https://community-static.tradeup.com/news/38e40c44fababa6849ceb15dfe8931a3","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3581837121803380","authorIdStr":"3581837121803380"},"htmlText":"Noted","listText":"Noted","text":"Noted","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940565101","repostId":1165421317,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9940569536,"gmtCreate":1678051297926,"gmtModify":1678051300447,"author":{"id":"4102135564535180","authorId":"4102135564535180","name":"Seah CL","avatar":"https://community-static.tradeup.com/news/970bca7b04e85a42a2c8eabed7ec96d0","vip":1,"crmLevel":3,"crmLevelSwitch":0,"idStr":"4102135564535180","authorIdStr":"4102135564535180"},"htmlText":"K","listText":"K","text":"K","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940569536","repostId":1165421317,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9940586366,"gmtCreate":1678044664056,"gmtModify":1678044667943,"author":{"id":"3558125435155143","authorId":"3558125435155143","name":"w00ters","avatar":"https://community-static.tradeup.com/news/4cb16cdf593f9f1166e80b07661fd62a","vip":1,"crmLevel":7,"crmLevelSwitch":1,"idStr":"3558125435155143","authorIdStr":"3558125435155143"},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":5,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940586366","repostId":1165421317,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9940510918,"gmtCreate":1678028791635,"gmtModify":1678028795351,"author":{"id":"4093058604760480","authorId":"4093058604760480","name":"GggSlimeR","avatar":"https://community-static.tradeup.com/news/4b805c8472adab6d9418f36452434a56","vip":1,"hat":"https://static.tigerbbs.com/b0a2963eb37c60c5d6d4a8dbcd266952","crmLevel":5,"crmLevelSwitch":1,"idStr":"4093058604760480","authorIdStr":"4093058604760480"},"htmlText":"Thanks &amp; Do not like my comment&nbsp;","listText":"Thanks &amp; Do not like my comment&nbsp;","text":"Thanks & Do not like my comment","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":5,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940510918","repostId":1165421317,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":596,"commentSize":16,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1165421317"}