Nio Stock Looks Vulnerable Ahead of a Critical Earnings Report

Nio (NYSE:NIO) stock has an awful lot riding on its upcoming earnings report.

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For any publicly traded company, earnings reports are critical as they present a showcase for stakeholders and prospective buyers. But for Nio, the financial disclosure for the second quarter will truly determine whether people can trust its shares at their present lofty levels.

It’s difficult to envy anyone who’s tasked to provide accurate guidance on NIO stock.

It all started with Nio’s Q1 earnings report earlier this year.

As Reuters stated, the EV manufacturer “posted a wider-than-expected loss and flagged a slowing pace of deliveries for its electric vehicles (EV) in the current quarter, sending its U.S.-listed shares down 7% in extended trading.” The article went on to state the following:

Nio, which makes the ES8 and ES6 electric sport-utility vehicles, said it expects to deliver 20,000 to 20,500 vehicles in the first quarter – up 15% to 18% from the fourth quarter.

The forecast, however, is slower than the 42% growth it reported between the third and the fourth quarter, in line with seasonal slowing in auto sales in China overall.

Last April, Nio received a $1 billion funding injection from the Chinese government, which has also helped the company tame recalls and stem falling sales.

Obviously, a downgrade in projections is never ideal, particularly for a growth play like NIO stock. With so many people enjoying immense profitability on this ticket, turning off the spigot could have grave consequences.

However, the company has since rebounded from the Q1-fueled slide. Moreover, our own Brenden Rearick pointed out more recent and encouraging news.

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Nio is tapping Ai Tiecheng, former general manager of WeWork Greater China, to be the vice president of strategic business for an unnamed sub-brand, which will represent Nio’s mid- and low-end EVs.

On the surface, it’s great news for NIO stock, but deeper down, it might be a double-edged sword.

Will Over-Ambitiousness Hurt NIO Stock?

One of the main challenges for EV makers has been profitability. Don’t kill the messenger but as CNN Business reported, Tesla’s net income doesn’t come from its EVs but rather, selling carbon credits to legacy automakers who risk running afoul of government-mandated restrictions on emissions.

The argument goes that these same companies will eventually stop buying carbon credits and build their own darn EVs.

To be fair, bearish hedge funds are the biggest proponents of this argument, but the thesis is a logical one that also imposes potential headwinds on NIO stock irrespective of the source.

Nio posted losses that exceeded downside expectations despite the company posting robust growth in the top line sequentially. Further, the influx of government cash apparently couldn’t adequately stem the tide of red ink, which isn’t confidence-inspiring.

Although debate rages on the topic, Massachusetts Institute of Technology research indicates that the Chinese adoption of EVs will have a substantial cost to consumers and to society.

MIT discovered that government subsidies played a significant role in cost savings. Strip that and other incentives away and you’re left with higher cost outlays for battery EVs since cost improvements for batteries are not enough to overcome non-incentive-based pricing.

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True, other theoretical projections — including that by other MIT researchers — contradict the idea that EVs are not as viable as previously thought.

While I don’t want to wade into this contentious debate, I think the numbers behind NIO stock speak for themselves: even with strong growth, profitability remains a challenge, and that will be even more of an obstacle when consumers of lesser means don’t realize the cost savings they thought they would receive.

As I Said, Q2 Is Critical

This brings me back full circle to my original point: the upcoming Q2 earnings report — scheduled for Aug. 11 — will set the tone.

If anything, it’s an opportunity for management to convince observers that the company’s effort toward profitability will be a credible one.

Nevertheless, if the numbers don’t back up management’s enthusiasm, it could be a long day for NIO stock. At a minimum, some caution is warranted here.

On the date of publication, Josh Enomoto 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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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