Nio's Strategic Turnaround: Can Margin Gains and Sub-Brands Drive a Near-Term Rebound?

Nio Inc. (NIO) has long been a poster child for China's electric vehicle (EV) revolution, but its path to profitability has been fraught with turbulence. Despite recording a 25.6% year-over-year jump in Q2 deliveries to 72,056 units, Nio continues to grapple with net losses and operational inefficiencies. Yet, beneath the surface, a confluence of strategic shifts—margin recovery, sub-brand expansion, and ecosystem monetization—hints at an inflection point. This article dissects whether Nio's undervalued valuation and upcoming catalysts justify a buy recommendation.

Competitive Positioning: Battery Swapping and Sub-Brands as Growth Levers

Nio's core advantage lies in its battery swapping ecosystem, which offers drivers a 3-minute recharge alternative to traditional charging—a feature Tesla and Li Auto lack. As of June 2025, Nio's cumulative deliveries hit 785,714 units, with partnerships like the one with GAC Group and FAW Group expanding its swapping infrastructure. This ecosystem not only reduces range anxiety but also generates recurring revenue through Power Battery as a Service (BaaS) subscriptions.

Beyond its premium Nio brand, the company's sub-brands—ONVO (family-oriented EVs) and FIREFLY (compact luxury EVs)—are unlocking new markets. For instance, FIREFLY's June deliveries hit 3,932 units, signaling strong demand for its affordable, high-margin models. Combined with Nio's Q2 deliveries, these sub-brands contributed to a 25.6% year-over-year sales growth, outpacing Li Auto's 19.8% vehicle margin in Q1 2025. This multi-brand strategy positions Nio to capture 80% of China's EV market, which is projected to grow at a 15% CAGR through 2030.

Margin Recovery: A Gradual Uptick, But Progress Is Visible

Nio's Q1 2025 gross margin of 7.6% marked an improvement over 2024's 4.9%, driven by cost reductions in in-house smart driving chips (NS9031) and higher-margin new models like the ES6 (targeting 20% vehicle margin). Management projects Q2's vehicle margin to hit 15%, with overall gross margin rising to 17-18% by Q4 2025. Key levers include:
- Cost Cutting: SG&A expenses are being trimmed to below 10% of sales revenue by year-end.
- Volume Scaling: The planned Q4 launch of the next-gen ES8 aims for monthly deliveries of 25,000 units, boosting economies of scale.
- High-Margin Segments: After-sales services and technical R&D revenue grew in Q1, contributing to Nio's $2.16B total revenue in Q2 guidance.

While Nio's Q1 net loss of RMB 6.75B remains a concern, the 3.4% sequential improvement from Q4 2024 suggests cost discipline is taking hold. Competitors like Tesla, which posted $664M free cash flow in Q1 2025, highlight Nio's runway for improvement.

Valuation: Undervalued, but Catalysts Are Lining Up

Nio's price-to-sales (P/S) ratio of 0.43 is below the industry average of 0.45, reflecting skepticism about its ability to turn losses into profits. However, two catalysts could unlock value:
1. Nio Power Spin-Off: The planned separation of its battery swapping business could attract infrastructure investors, monetizing a $3B+ asset.
2. European Expansion: Nio's entry into the EU—where it faces Tesla's pricing pressure—could leverage its BaaS model to undercut rivals.

Challenges and Risks

Nio's path is not without hurdles. Operational costs remain high: R&D expenses rose 10.5% YoY in Q1, while selling/admin costs surged 46%. The company's $4.5B cash balance offers a buffer, but sustaining losses while scaling could strain liquidity. Additionally, Tesla's aggressive pricing and Li Auto's stronger margins pose competitive threats.

Investment Thesis: Buy on the Dip

Despite near-term losses, Nio's multi-brand strategy, margin trajectory, and ecosystem monetization create a compelling long-term narrative. The 20.4% YTD underperformance vs. the automotive sector offers a buying opportunity. Key triggers for a rebound include:
- Q3/Q4 margin expansion to 15-18%.
- Spin-off execution unlocking Nio Power's value.
- European sales ramp-up, which could add $1B+ in annual revenue by 2026.

Recommendation: Buy NIO with a 12-month price target of $25, implying a 40% upside from current levels. Investors should monitor Q3 gross margin results and Nio Power's spin-off timeline. While risks remain, the combination of undervalued multiples and strategic execution could make Nio a standout EV play in 2025-26.

This analysis assumes Nio's margin targets are achieved and macro conditions stabilize. Risks include supply chain disruptions and regulatory shifts in China's EV sector.