China-based electric carmaker Nio Inc. (NYSE: NIO) stock has fallen over 68% in the past year due to softness in vehicle deliveries. The shares have been trading near the 52-week low ahead of its second-quarter earnings results expected next week. The company has been facing several headwinds that could hinder its growth in the electric vehicles market.
Nio could see an increase in the competition from its rival Tesla (NASDAQ: TSLA), which started constructing a factory in Shanghai without a joint venture partner. The tough competition along with the federal tax credit, which will be taken off completely starting next year, have made it difficult for Nio to manage in the EV space as this will reduce the company’s pricing advantage.
The company has strategically entered into the premium EV segment and it expects this segment to become more competitive in the future as additional players enter this segment. The economic conditions have been strengthening lately after the US and China agreed to hold high-level trade talks early next month. This could turn as a headwind for Nio in the future.
At the end of the first quarter, Nio had $1.11 billion of cash and short term investments while its total debt stood at $1.38 billion. For the trailing twelve months, Nio had a negative return on assets of 44.10% and a negative return on equity of 433.12%. The company has been burning cash in repaying the debt and in production activities.
The battery recall has prompted the company to turn its focus towards battery production capacity, which in turn impacted vehicle production and deliveries during July month. The low production levels have hinted that the company’s business requires more capital and this is likely to weigh on the stock.
Historically, automobile customers have expected car manufacturers to periodically introduce new and improved vehicle models. However, to date, the company has limited experience designing, testing, manufacturing, marketing and selling its electric vehicles and therefore unable to meet the customer expectations. Nio has been lagging in meeting customer expectations.
The company’s return on investment will be lowered as its prior models could become obsolete more quickly than expected despite keeping pace with changes in technology and developing new models. This is specifically for battery cell technology, which could involve substantial costs and lower return on investment for existing vehicles.
Nio’s growth prospects remain doubtful due to the failure to successfully react to changes in existing technologies, including alternative technologies. The business and prospects could be hurt by the developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine.
The demand for electric vehicles is expected to remain at stake as signs of a global recession is brewing slowly in different parts of the globe. A data from IHS Markit stated that the manufacturing sector is currently witnessing a contraction at over 60% of the countries around the globe.