Nio analysis: what happened?

 It has been a week since the release of  Nio's Q4 2020 and FY2020 earnings, but contrary to my analysis as posted before, the stock price fell. I've done some research to find out why.

Nio's stock price was right below US$50 at the start of this week before it dropped to US$46 a share right after earnings release. In a consulting book "Case in Point", I learned that when we analyse a situation, we need to look at the environment. Using the E(P=R-C)M Framework, it shows that your profits = revenue - cost. The E and M on both ends represent economy and market respectively. So, when Nio's stock fell, did the market index fall? DJIA, S&P500, and NASDAQ were all down as of 4th March closing. So it seems that at least some part of the fall in stock price can be attributed to market conditions, and perhaps some to Nio's earnings.

Market conditions

1) bond yields are increasing due to a decrease in demand for bonds and hence a decrease in bond prices. So bond yields are coupons divided by bond prices. With an increase in bond yields, the cost of borrowing and financing increases, as the required rate of return by firms also increases. Thus, investors require a higher return to compensate for the same level of risk, driving the stock prices down. From my university class on International Finance, we looked at DJIA and NASDAQ which prices have dipped recently, with a larger dip for NASDAQ. Perhaps this is because, in times of uncertainties, people may choose to buy value stocks that are more prevalent in DJIA than in NASDAQ. Furthermore, for growth stocks, cashflows and earnings come further in the future, so prices are more sensitive to the rate of return and there is more uncertainty. This overall situation of bonds and stocks going down is perhaps due to (expectations of) rising inflation and could be the transition to a period of uncertainty from a Fed-supported market to an economy-driven one, as mentioned by Chicken Genius Singapore on YouTube.

2) global chip shortage. According to CNBC, there is a "$60 billion global chip shortage for the auto industry". These semiconductor chips are extremely crucial in the manufacturing of vehicles and present a $60 billion loss in revenue in the industry. Because of this, Nio cut its production capacity for Q2 2021 from 10k to 7.5k vehicles per month, which translates to an estimated 90k vehicles delivered for 2021, which is still more than double the 43k in 2020. When the pandemic hit, vehicle sales crashed and automakers reduced their orders for materials including these chips (HBR). There are other reasons for the shortage in chip production, but more than that, transportation of these chips has also been a problem due to shortage of containers among other reasons.

Internally, we look at Nio's earnings. Nio's Q4 2020 loss was larger than Wall Street's expectations at US$0.07 per share compared to the actual loss of US$0.14 per share. On the bright side, total revenues for Q4 2020 have increased to US$1 billion, a 47% increase over Q4 2019. Revenues for 2021 are on track to be an increase over 2020, and the semiconductor industry should recover. According to CNBC, SMIC, China's largest semiconductor manufacturer could fill the gaps in demand. TSMC, the world's largest semiconductor manufacturer, has a larger budget for its capital expenditures for 2021, which will eventually increase chip production.

Overall, the dip seems to be temporary, and it is possible to take advantage of this to lower one's average cost in Nio.