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Could NIO’s Q2 Results Turn Things Around?

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Sep. 23 2019, Updated 11:51 a.m. ET

NIO (NIO), also known as “China’s Tesla,” is scheduled to report its second-quarter results before markets open tomorrow. The stock has seen a massive sell-off since March, though it has had bouts of strength. In July, the stock rose 36%, boosted by NIO’s strong second-quarter car deliveries. Year-to-date, the stock has fallen 52.3%. Meanwhile, major Chinese tech stocks Tencent Holdings (TCEHY), Baidu (BIDU), and Alibaba have returned 8.4%, -33.7%, and 33.2%, respectively. Tencent and Baidu invest in NIO.

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NIO underperforming global auto stocks, including Tesla

NIO stock has underperformed its auto peers this year. While NIO has fallen 52.3%, Tesla (TSLA) has fallen 27.7%. Tesla has had several positive developments in China, including a 10% purchase tax break and impressive progress at its Gigafactory 3. General Motors and Ford stocks have risen 11.7% and 19.9% this year, respectively.

Battery recalls, weak deliveries, and China subsidy rollback

NIO stock has struggled for several reasons. The company delivered just 837 units in July. China’s weaker macroeconomic and auto market conditions and NIO’s battery recall for 4,803 ES8s impacted its deliveries.

In June, China eliminated subsidies for new energy vehicles with under 250 kilometers (about 155 miles) of electric range. Meanwhile, subsidies were halved for higher ranges. The rollback dragged down EV (electric vehicle) sales for a second straight month in August in China and for its largest EV manufacturer, BYD (BYDDF).

Competition is also taking a toll on NIO and other Chinese EV makers. Furthermore, NIO stock received another setback when its cofounder, Jack Cheng, left the company in August. In March, the company also withdrew plans to build a factory.

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NIO’s Q1 results and analysts’ expectations for Q2

During its first quarter, NIO reported an adjusted net loss per share of 2.42 Chinese yuan (-$0.36). It beat analysts’ estimate of a 3.23 yuan net loss. Its revenue of 1.63 billion Chinese yuan ($243 million) also beat their estimate of 1.53 billion yuan.

In the second quarter, analysts expect the company to post EPS and revenue of -$0.18 and $185 million, respectively. The company has guided for $169 million–$183 million in revenue.

NIO’s second-quarter deliveries

During the first quarter, NIO’s car deliveries tanked by 50.0% sequentially. And in the second quarter, they rose 10.9% sequentially to 3,553 units, beating NIO’s guidance of 2,800–3,200 units. However, this beat may have been because of Chinese consumers scrambling to get EV tax rebates before their removal in late June.

What to watch for in NIO’s results

Several challenges still face NIO. Tesla’s Gigafactory is set to start producing Model 3s before the end of the year, boosting competition in the already crowded Chinese EV market. Also, NIO’s funds have fallen as it struggles with deliveries. Automobility founder and CEO Bill Russo thinks NIO’s capital-intensive nature means Tencent’s recent funding “won’t last long.”

The company will have to keep up with its deliveries and rollouts to offset its stock decline and regain investor confidence. However, with competition growing and funds deteriorating, this seems like an uphill task. Investors will want to listen for management’s comments for insights on the company’s outlook.

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