Summary in Plain Language
This is a very counterintuitive analysis of NIO’s financial report: A year ago, the entire industry was speculating about whether NIO would go bankrupt. Today, NIO has been profitable for three consecutive quarters, with its main business (car sales and services) generating revenue. Its gross profit margin of 18.5% places it in the top tier of new automotive companies, second only to Xiaomi, far exceeding that of Li Auto and Xpeng. The number of vehicles delivered has also reached a record high. However, surprisingly, after the financial report was released, NIO’s stock prices in both the Hong Kong and U.S. markets plummeted, reaching their lowest levels in 52 weeks.
The fundamental contradiction is that NIO has already crossed the critical line of survival, but the capital market does not recognize its current achievements. Instead, it is concerned about whether NIO can quickly expand its scale and generate substantial profits in the future. This disparity in perception is the core reason for the decline in stock prices despite the company’s profitability.
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Detailed Analysis
1. Why do stock prices fall despite profitability?
The capital market’s perspective is quite practical. Many people don’t understand: Shouldn’t profits be a positive sign for a company’s stock price? The reason for the decline lies in the different definitions of “profits”:
- The first type of profit refers to “revenue from the main business.” It’s like running a restaurant; after deducting the cost of ingredients and employee salaries, any remaining income is profit. NIO is in this situation, with its main business generating around 200 million yuan per quarter, clearly moving beyond the stage where it was losing money on each car sold.
- The second type of profit includes all sources of income after deducting expenses such as rent, equity incentives for key employees, and interest on debts. NIO is still in the red on this front, with a loss of 528 million yuan, although this is much better than its previous losses of several billion yuan.
More importantly, there is a mismatch in expectations from the capital market. Investors expected NIO to significantly increase its sales volume and profits after overcoming its financial difficulties, but its third-quarter sales forecast was almost the same as the second quarter’s. It’s like a restaurant that has just started making a profit, and investors expected it to open ten new branches next month, only to find that sales will be similar to this month’s. Naturally, they became disappointed and sold their shares.
2. While others are cutting prices and competing fiercely, NIO has secured its position in the high-end market
NIO has several advantages that its competitors cannot match, which it built through previous investments:
- Its high-end brand has taken hold. The average price of NIO’s vehicles is 404,000 yuan, much higher than that of Cadillac and Volvo. 75% of its sales come from the ES8 and ES9 models, which cost around 400,000 to 500,000 yuan. Over 60% of its customers have switched from brands like BMW, Audi, and Porsche, so NIO doesn’t need to rely on price cuts to compete. This is different from many new companies that lower prices to attract customers from their own brands.
- The three NIO brands (ES8/ES9, LD, and Firefly) each target different market segments, avoiding competition for the same customers. This strategic depth is a significant strength.
- Two previously burdensome assets have become valuable assets: NIO’s self-developed Shenji chip reduces the cost of automotive technology significantly, as it only needs one chip instead of four from NVIDIA. The company no longer relies on suppliers for these components. Additionally, the battery swapping infrastructure, which used to be a costly investment, has been transformed into a profitable service model with local government funding and NIO’s operation.
- The LD brand, which was once a major concern, has become a liability. Initially, there were high expectations for it to become a cost-effective vehicle that would boost NIO’s annual sales. However, Li Bin clarified that the LD brand would be positioned above Toyota and Volkswagen, with prices above 200,000 yuan. While this has maintained the brand’s value (with an average price of 248,000 yuan, higher than Cadillac’s), it has hindered sales, with only 8,810 units sold in August, a 50% decrease year-on-year. The LD brand will now face direct competition from Xiaomi’s and BYD’s products and will need to expand to third- and fourth-tier cities. A new, strategic model is expected in 2027 to boost sales.
3. The automotive industry faces new challenges: AI is disrupting the industry
Li Bin pointed out a crucial issue: The automotive industry is facing three major challenges due to AI:
- Rising costs: Companies developing AI systems are competing for essential materials like chips, circuit boards, and metals, driving up prices. NIO’s costs have increased by 14,000 yuan per vehicle, resulting in a 1.5-billion-yuan loss in the second quarter. Automakers cannot negotiate lower prices because AI companies are willing to pay more.
- Talent competition: Engineers working in autonomous driving are being recruited by AI startups, which offer much higher valuations. Automakers cannot compete with these offers.
- Capital diversion: Hot money in the market is flowing into AI, making automotive companies less attractive to investors compared to AI startups, which offer more appealing narratives.
4. NIO’s next growth path: Moving beyond car sales
NIO is already exploring alternative revenue streams:
- Existing customer business: With millions of vehicles sold, NIO can generate additional revenue from subscription services for advanced driving features, battery swapping, and related community activities, even if new car sales remain stable.
- AI hardware business: The total cost of semiconductors in NIO’s vehicles has surpassed that of batteries. NIO can potentially sell its own chips and driving systems to other automakers, generating revenue from its technology.
However, the capital market still views NIO as a traditional automotive company and does not recognize these new revenue sources. Only when these new businesses start generating substantial revenue will NIO’s market value increase.
In summary, NIO is like a startup that nearly went bankrupt but has now turned profitable. Investors either expected it to fail or to soar. Now that it is developing steadily, some are expressing skepticism. However, with its technology, brand, and battery swapping network, NIO is in a much stronger position than it was in 2021, when its market value was 600 billion yuan. Whether it can continue to grow will depend on its ability to maintain monthly sales of around 40,000 vehicles in the fourth quarter.