Shares of electric vehicle manufacturer NIO Inc. (NYSE:NIO) have been part of a systemic drawdown in Chinese American depositary receipts. However, other fault lines could amplify the stock’s decline, and until those get rectified, there’s little hope for the company’s investors for the time being.
The global chip shortage is becoming more than a temporary issue to automakers. Toyota Motor Corp. (NYSE:TM) announced it has to cut 40% of its production, and Ford Motor Co. (NYSE:F) shortly after announced it suspended production of its F-150.
Source: St. Louis Fed
The shortage has caused input costs to rise substantially, and the price of semiconductors along with it. NIO has doubled its inventories (now 338.27 million in finished products) since the turn of the year, which should see it through in the near term, but if the delta variant causes further semiconductor issues, you’d have to question the company’s ability to match demand.
I’ve spoken of the systemic climate for Chinese stocks for a while now, so I’m not going to do it again as I believe the issue is transparent to everyone at the moment.
What I would like to reiterate is the fact that NIO is an American depositary receipt.
This means that it’s a shell company listed on the New York Stock Exchange with limited financial reporting transparency.
Environmental, social and governacne practices are becoming increasingly important to institutional investors, so any sign of poor reporting quality severely damages the prospects of any stock.
Ongoing operating costs amid competition
NIO‘s operating expenses have grown by another 11.67% year over year as the company has been forced to spend heavily on research and development as well as marketing as competition for Chinese EV market share intensifies.
The company’s manufacturing agreement with JAC Motors adds to financial efficiency woes as competitors who’re manufacturing their own cars are operating at better margins.
Although NIO topped its second-quarter earnings expectations in August with a revenue beat of $12.26 million and an earnings beat of 5 cents per share, the outlook remains glum.
NIO‘s management cited chip shortages and economic trends as a reason to revise their outlook. They now expect 22,550 to 23,500 cars to be delivered in the next quarter versus the previous consensus of 23,000 to 25,000.
All of the mentioned factors play into the company’s poor valuation. As the automotive sector is expected to underperform in general, NIO‘s enterprise value/sales ratio (14.54) exceeds the sector by 810.46%, while its price-sales ratio (13.59) exceeds the sector average by 926.78%.
I’m not saying that NIO won’t be a good investment again sometime in the future, but investors can expect further drawdown before that happens.
This article first appeared on GuruFocus.