NIO Stock in Free Fall! Looking for a Silver Lining?

NIO was one of the market's biggest losers today, losing 5.7% of its value and underperforming the S&P500 and Dow Industrial composite indices by 5.2% and 5.5% respectively. The large-cap Consumer Cyclical company ended the day at $9.87, closing in on its 52 week high low of $8.38 Over the last 12 months, NIO is down -74.8%, and has underperformed the S&P 500 by 59.4%. The stock has an average analyst rating of None.

NIO does not publish its forward or trailing price to earnings (P/E) ratio because the stock has negative forward and trailing earnings per share (Eps) values at $-0.46 and $-0.7 respectively. Since P/E ratios are share price divided by earnings per share, NIO has a negative P/E ratio, which is not meaningful besides the fact that it indicates the company is not currently profitable.

When it comes to new businesses -- especially those operating within the technology sector -- investors are often willing to overlook prolonged periods of negative earnings and inflated valuations. But not so in the Consumer Cyclical sector, which has an average P/E ratio of 24.11. If NIO cannot improve its earnings picture soon, it's unlikely that investors will stay onboard -- unless there are other factors in favor of the business's outlook.

We can also understand a stock's valuation by looking at its Price to Book (P/B) Ratio, which is its share price divided by its book value per share. The book value refers to the present value of the company if it were liquidated today. NIO's P/B ratio of 0.6 indicates that the market value of the company is less than its market value, which indicates the company is potentially undervalued.

To understand NIO's business, and therefore its attractiveness as a potential investment, we must analyze its margins in two steps. First, we look at its gross margins, which take into account only the direct cost of providing the product or service to the customer. This enables us to determine whether the company benefits from an advantageous market position:

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2021-12-31 36,136,423,000.0 29,314,990,000.0 18.88 63.89
2020-12-31 16,257,933,000.0 14,384,514,000.0 11.52 175.2
2019-12-31 7,824,904,000.0 9,023,726,000.0 -15.32 -196.32
2018-12-31 4,951,171,000.0 5,207,047,000.0 -5.17 n/a
  • Average gross margins: 2.5 %
  • Average gross margins growth rate: 14.3 %
  • Coefficient of variability (lower numbers indicate more stability): 627.9 %

Next, we consider the NIO's operating margins, which take into account overhead. This tells us whether the company's business model is fundamentally profitable or not:

Date Reported Total Revenue ($) Operating Expenses ($) Operating Margins (%) YoY Growth (%)
2021-12-31 36,136,423,000.0 40,632,726,000.0 -12.44 56.1
2020-12-31 16,257,933,000.0 20,865,578,000.0 -28.34 79.98
2019-12-31 7,824,904,000.0 18,904,093,000.0 -141.59 26.94
2018-12-31 4,951,171,000.0 14,546,779,000.0 -193.8 n/a
  • Average operating margins: -94.0 %
  • Average operating margins growth rate: 54.3 %
  • Coefficient of variability (lower numbers indicate more stability): 93.5 %

From the above, we can see that NIO is not a profitable business. While unprofitable businesses may provide shareholders with attractive short term returns, more conservative investors will prefer to wait until the business can reach a profit before committing.

Our final point of analysis is NIO's free cash flow. While earnings and margins are calculated on the basis of a company's delivered goods, they do not actually represent physical payments that flow into the coffers. The actually money that the company has -- minus its capital expenditures -- is reported as its free cash flow, which for NIO is as follows:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2021-12-31 1,966,386,000.0 -4,078,764,000.0 -2,112,378,000.0 -356.6
2020-12-31 1,950,894,000.0 -1,127,686,000.0 823,208,000.0 107.89
2019-12-31 -8,721,706,000.0 -1,706,787,000.0 -10,428,493,000.0 1.21
2018-12-31 -7,911,768,000.0 -2,643,964,000.0 -10,555,732,000.0 n/a
  • Average free cash flow: $-2,112,378,000.00
  • Average free cash flow growth rate: -82.5 %
  • Coefficient of variability (lower numbers indicating more stability): 104.4%

Free cash flow represents the money that NIO can use to either reinvest in the business or to reward its investors in the form of a dividend. Since the company's most recent cash flows are negative, it comes as no surprise that investors do not get a dividend.

NIO does not meet the traditional definition of a fairly valued company. Unless the company has strong qualitative factors in its favor, most value investors will probably prefer to avoid this stock.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.