Why Optimistic Nio Investors Might Need to Pump the Brakes

Investors in Nio (NYSE: NIO) have been optimistic, pushing the Chinese electric vehicle (EV) maker's stock 41% higher over the past six months. Deliveries are on the rise, its two new brands -- Onvo and Firefly -- are gaining traction and entering new right-hand-drive markets, and it hopes to break even in the fourth quarter.

Let's look closely at why investors are optimistic, but also why recent data from Chinese rival XPeng should have Nio investors pumping the brakes on the hype.

What's going on?

It's not too difficult to understand why Nio investors are optimistic. Onvo and Firefly are gaining in popularity with consumers, who are driving deliveries higher. Nio delivered 40,397 vehicles in October, a new monthly record and a 92.6% increase over the prior year.

There's still room for growth as the newest brand, Firefly, continues to expand market share: It accounted for only 5,912 of the total vehicles delivered last month. Onvo is also still gaining momentum, and its flagship SUV, the Onvo L90, achieved a new record with monthly deliveries exceeding 10,000 for three consecutive months since its official launch in July.

However, despite Nio's strong sales and delivery momentum, the company still finds itself in a brutal price war in China. The government highly subsidized its automotive industry and helped foster the development of numerous domestic brands with a focus on EV technology and innovation. But it worked too well, and the industry is now overcrowded.

Recent data from Chinese rival XPeng (NYSE: XPEV) should have Nio investors tempering their optimism heading into the fourth quarter. XPeng announced fourth-quarter revenue estimates that were below expectations as the intense competition makes gaining market share challenging and pricing power difficult. It may have come as a surprise to investors who had doubled the price of XPeng's shares before this week's decline.

XPeng's warning signals of a slowdown in the fourth quarter should catch the attention of Nio investors because, similar to Nio, it had posted record deliveries in October and had momentum -- partly at the expense of Tesla, which had a three-year low in China deliveries.

For XPeng investors, the issues may go a little deeper. The company recently unveiled its work on a futuristic "flying car" concept, as well as humanoid robots for warehouse applications. These are among the long-term projects that require huge research and development investment, which could press margins and earnings.

A Nio battery swapping station. Image source: Nio.

Is Nio a buy?

Thanks to its new sub-brands, Nio has been increasing its deliveries consistently, and combined with its namesake premium brand has a product portfolio that covers key segments and price points. It also has differentiated itself with its battery swap network, which could grow into an even stronger competitive advantage as more Nio vehicles using the service are on the road.

Perhaps the strongest argument for optimism is that management has been able to stabilize margins -- and sometimes even improve them -- after they initially declined due to the price war. Cost-cutting, improving scale, and manufacturing components in-house all play a role in supporting margins. Once the price war fades, the leaner Nio should benefit financially.

At the end of the day, it has momentum, but investors have to realize that the Chinese auto market is currently brutal, tariffs may slow international expansion, and the company is not yet profitable. Nio should remain a small position in any portfolio, and investors should prepare for a possible slowdown in its momentum toward the end of 2025.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.