After a strong performance in 2020, NIO (NYSE:NIO) faced a disturbing year as shares of the electric vehicle (EV) manufacturer declined 38% to $31.68 per share in 2021. Since the beginning of the year, NIO stock has lost more than 50% of its value. The selling pressure appears unstoppable as global market dynamics continue to favor defensive stocks.
However, the EV market marginally surpassed the performance of the broader market in 2021. As seen in the chart below, The Global X Lithium & Battery Technology ETF (NYSEARCA:LIT) advanced 27.6% to $84.44 per share last year, whereas the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gained 26.6% to $474.96 per share. This momentum reverted in 2022 as EV losses outpaced market declines.
NIO stock will be scrutinized ahead of the release of its fourth-quarter and full-year 2021 results on March 24. In this context, investors following this premium EV company might be wondering if it is time to catch this falling knife.
Forward Guidance Caution Weighed on NIO Stock
As days go by, the Chinese EV market is getting more and more established. In the past years, the country subsidized EV sales to support the development of the industry. This policy is, however, expected to come to a standstill by the end of the year.
China’s Finance Ministry announced new subsidy cuts, reducing EV incentives by 30% in 2022 after initial reductions of 10% and 20% in 2020 and 2021. This does not augur well for Chinese EV manufacturers, which will likely witness lower sales and weaker profits.
However, Nio’s car sales have been marginally impacted by these announcements. The premium EV company delivered 6,131 vehicles in February, representing an increase of 9.9% year-over-year (YOY), and 9,652 vehicles in January, up 33.6% YOY.
The damaging performance was caused by Nio’s conservative Q4 guidance. It expected deliveries between 23,500 and 25,500 units in the quarter. The midpoint of the guidance represents around the same number of cars delivered in Q3 2021, i.e. 24,439 units. In addition, Nio lowered adjusted revenue guidance to a range of $1.46 billion to $1.57 billion versus a consensus of $1.75 billion.
With this cautious forward guidance stance, earnings and deliveries will be monitored carefully by investors. Additional weakness on revenue or EV deliveries will adversely impact NIO stock.
Nio Stock Is Close to Yielding a Profit
Even with the freezing of EV subsidies and the prudent forward guidance of the group, Nio’s fundamentals improved in the past year. The consensus of analysts sees more upside in the next years.
Nio’s net sales are expected to soar 120.3% in 2021 to 35.8 billion Yuan. The rapid growth of the EV carmaker should endure, as net sales are forecast to surge to 63.2 billion Yuan in 2022 and 99.4 billion Yuan in 2023.
On the other side, Nio’s bottom line should remain in deficit this year with a net expected loss of 2.28 billion Yuan. However, analysts expect Nio to break even in 2023, reaching a net income of 1.63 billion Yuan. This will likely provide sturdy support for NIO stock.
In addition, the balance sheet of the EV specialist is well-capitalized. Nio has an expected net cash position of 27.1 billion Yuan as of the end of 2021. The company has enough resources to fuel growth until it thrives in 2023. This is an important sign in the context of interest rate normalization. In these times, companies with an unsustainable level of debt are riskier and thus less attractive for market participants.
NIO Stock Is Priced in Line With Its Counterparts
The correction of NIO stock in the past two years has brought its valuation to ground levels in terms of enterprise value (EV)-to-revenue. Nio is valued at 2022 EV/Revenue of only 2.47x. Despite this attractive ratio, it is stretched in terms of its price-to-book (P/B) ratio of a 7.54x.
LI Auto (NASDAQ:LI), a peer of NIO stock that is getting more and more traction in China, posts a 2022e EV/Revenue ratio of 2.73x and a P/B ratio of 4.61x. At the same time, Tesla (NASDAQ:TSLA), the most valuable EV company in the world, exchanges at an EV/Revenue ratio of 8.02x and a P/B ratio of 16.6x.
Despite trading at a high P/B ratio, I expect the bearish momentum of NIO stock to prevail if the company misses its upcoming guidance. Yet, for long-term investors, its massive price correction is an opportunity because it consistently enhances its fundamentals and is likely to soon yield a profit.
Besides, with a solid balance sheet and a massive pile of cash, Nio has all the means to reach its international aspirations. Therefore, NIO stock deserves a place in your portfolio as a long-term buy.
On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.