Nio (NYSE:NIO) investors have certainly seen better days. NIO stock is down 28% so far in 2022. Shares of the Chinese electric vehicle maker trade at nearly $24 a share, having a 52-week range of $19.31 to $64.60. That’s quite a lot of pain. So how did all the excitement about this stock disappear?

NIO declined for a few valid reasons. Namely, the fundamentals behind the stock aren’t as pretty as you might think and its valuation is too extreme.

Now the logical question to ask is whether its current, lower price makes NIO stock a buy. While it might be tempting to some, I still don’t think it’s worth it at this price point. Several concerns come to the forefront after analyzing the Q3 2021 financial earnings report.

Technical analysis may show that the stock is now oversold. This does not mean that in mid $20s the stock is a bargain. Do not confuse value with price. Here’s a closer look at why I remain bearish on NIO today.

NIO Q3 2021 Earnings: Increased Deliveries, Net loss Remains

In the third quarter of 2021, NIO reported an increase in vehicle sales of 102.4% from Q3 2020 and 9.2% from Q2 2021. Total revenues of $1.52 billion showed an increase of 116.6% from the third quarter of 2020 and an increase of 16.1% from the second quarter of 2021. The gross margin was 20.3%, compared with 12.9% in Q3 2020 and 18.6% in Q2 2021. All of this is positive news.

But that positivity can be deceptive. This is where most investors tend to see growth and become too optimistic about the prospects of the company. They tend to neglect other key financial metrics and valuation. So what are the red flags from the Q3 2021 earnings report that most investors are overlooking?

First, the vehicle margin was 18%. In Q3 2020 it was 14.5% and in Q2 2021 this figure was 20.3%. According to NIO, “[v]ehicle margin is the margin of new vehicle sales, which is calculated based on revenues and cost of sales derived from new vehicle sales only.”

This vehicle margin declined on a quarterly basis and should be monitored closely over the next quarters as NIO has plans to increase its manufacturing capacity, start delivering the luxury ET7 model next month and its midsize ET5 sedan in September.

Profitability continues to be a riddle hard to solve for NIO. In fact, the firm reported a net loss of $443.7 million in Q3 2021. That’s a 140.7% jump from Q3 2020 and a 333.6% leap from the results reported in Q2 2021.

Its operations losses added up to $153.9 million in Q3 2021 — a 4.9% increase from Q3 2020 and 29.9% increase from Q2 2021.

Meanwhile, the cost of sales in the third quarter of 2021 increased 98.3% from Q3 2020 and 13.6% from Q2 2021. These details gain further meaning if you consider this comment by NIO itself: “The increase in cost of sales over the third quarter of 2020 and the second quarter of 2021 was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the third quarter of 2021.”

You do not need to be an analyst to decode what this statement means. In essence, the higher output should continue to add incremental costs.

A few months ago, Elon Musk made an insightful comment about other EV makers. He said that what matters for other competitors is the path to break-even profitability and how they handle scalability in their operations. He is 100% correct. This commentary gives me another argument to highlight about NIO.

Judging NIO’s Expansion Plans

NIO plans to start selling its models in other European countries other than Norway in 2022. These countries include Germany, the Netherlands, Sweden and Denmark. My main concern is that NIO is now unprofitable selling electric cars in China and Norway. What makes it optimistic that the path to profitability is to expand to other countries?

Has NIO considered it will have a competitive advantage based on pricing, starting from capital expenditures to develop a network of sales, support and marketing network?

Some say naysayers like me who focus on the fundamentals mostly ignore the tremendous potential of the EV industry. It’s true: The future of mobility is electrification. But this does not mean that the price is right for the majority of EV stocks right now.

NIO Stock Remains Too Pricey

For EV makers book value per share is an important valuation metric to monitor. MorningStar reports a book value per share (TTM) of $2.41. With the current stock price of NIO at about $24, this implies a 9.95x ratio, which is not cheap.

Furthermore, SeekingAlpha estimates NIO to have a forward price-to-sales ratio of 6.78x and a forward enterprise value-to-sales ratio of 6.84x. The median values for the Consumer Discretionary Sector for forward P/S and EV/sales are 1.07x and 1.29x, respectively.

If you add all of that up together, it’s clear that NIO stock has a large premium that cannot be fully justified yet based on its fundamentals.

In summary, NIO is still too expensive and the firm struggles to achieve profitability. Treating the stock’s decline as a reason to blindly invest in this EV maker is like going camping at the hills of a mountain after heavy snowfall. An avalanche is a key concern you should not neglect.

Keep an eye on NIO stock over the next few quarters. It can still move lower if vehicle margins and profitability do not improve much.

On the date of publication, Stavros Georgiadis, CFA  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.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.