To The Moon

$NIO Inc.(NIO)$ has just released its second quarterly report.

After the release of the earnings, NIO dived in the stock market in the pre-market, falling by more than 7%.

NIO's earnings report was very bad. Its revenue growth slowed down sharply, and losses skyrocketed.

To date, the earnings reports of all 3 Chinese new energy vehicle companies have been released. All three companies' sales guidance for the Q3 is less than expectations, making people wonder about the future development of new energy vehicles.

1. Key Earnings data

• Q2 revenue of RMB 10.292 billion, up 21.8% yoy, exceeding consensus estimates of 9.8 billion.
• Q2 gross margin: 13%, lower than 18.6% in the same period last year.
• Q2 car sales: 25,059 units, up 14.4% yoy.
• Q2 car sales revenue: $9.57 billion, up 21% yoy.
• Q2 service, finance and used car sales revenue: $720 million, up 34.6% yoy.
• Q3 sales guidance: 31,000-33,000 units.

a: New energy vehicle companies can hardly boost market confidence when their revenues beat expectations.

The main reason is that new energy vehicle companies release monthly vehicle sales data, from which revenue growth rates can be projected.

b: The reason for higher revenue growth than sales is that the average selling price of cars rose in the second quarter.

Due to the pandemic, there was a shortage of supply in the auto chain in the second quarter and consumer demand was dampened. The market is not surprised that revenue growth will slow down.

However, gross margin declined at the same time.

c: Gross margin in the second quarter was only 13%, down from 14% in the first quarter and 18% last year.

(1) The decline in gross margin is mainly due to the increase in battery costs.

From the current point of view, new energy vehicle companies have not yet passed the cost pressure to downstream consumers, highlighting the lack of pricing power ability of vehicle companies.

The gross profit margin of NIO was 21.5% in the second quarter, higher than 18.9% in the same period last year, and the gross profit margin of NIO was much different from the ideal.

(2) NIO's strong investment in service network also suppressed the gross margin.

d: The company expects sales in the range of 31,000-33,000 units in the third quarter.

Based on the upper limit of the guidance, the sales growth rate is about 35%, better than 28.5% in the first quarter and 14.4% in the second quarter. However, this guidance is very poor compared to the 100% growth rate for 2021.

Considering NIO's new launch of ES7 in August and upcoming delivery of ET5 at the end of September, investors can look forward to how management will explain during the earnings call.

2. Comparison of the three EV giants in China

A brief review of $Li Auto(LI)$ and $XPeng Inc.(XPEV)$ 3Q sales guidance.

$Li Auto(LI)$ previously had only one model. The newly released L9 is a replacement for the one, so consumers are waiting for the new car. As a result, the upper limit of sales guidance for the third quarter is only 7.5%-15.5% year-over-year.

$XPeng Inc.(XPEV)$ 's sales guidance for the third quarter is only 13%-20.8% year-over-year.

NIO's guidance is better than these two companies.

But is there an impact of increased competition behind the slowdown in growth for all three companies over the same period? It remains to be seen if the three giants can stand out.

3. Skyrocketed Losses

In addition to the slowdown in growth, NIO's losses have expanded significantly.

NIO lost 2.76 billion in the second quarter, a surge of 370% year-on-year!

(1) gross margin declined

(2) NIO invested significantly in R&D, sales and administrative expenses.

Due to the increase in staff and new model development and marketing, R&D investment in the second quarter was 2.1 billion, a 143% jump year-on-year; sales and administrative expenses were 2.3 billion, a 52% jump year-on-year.

If sales are slow to break through, a mere 30% growth is hardly enough to support the current 5x market sales ratio.

Bottom Line

Perhaps the market's expectations for new energy companies are shifting from growth to profitability. Even though NIO has $54.4 billion in cash, these assets are a drop in the bucket for the asset-heavy auto industry.

Investors should focus on tracking monthly sales, and all problems can be solved in the growth.